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Market Analysis: Dec 26, 2008: Darin Newsom

posted on December 26, 2008


Commodity markets were closed Thursday in honor of Christmas, so prices referenced on this week's show were quoted from Wednesday's close.

For the holiday-shortened week, March wheat gained nearly 20 cents while the nearby corn contract moved over 17 cents higher.

But, the real action again this abbreviated week was in the soybean pits, where the January contract gained nearly 50 cents, while the nearby meal contract was up more than $20 per ton.

In the softs, cotton trended higher again with the March contract posting a gain of $1.13.

In livestock, December cattle rose $1.37. Nearby matched that gain to the penny. And the February lean hog contract lost 85 cents.

In other markets of interest, the Euro gained nearly 100 basis points against the dollar. Crude oil lost $4.45 per barrel. Comex Gold rose more than $10.50 per ounce. And the Goldman Sachs Commodity Index lost more than 15 points to close at 318.85.

Market Analysis: Dec 26, 2008: Darin Newsom Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, good to have you with us.

Newsom: Thanks, Mark.

Pearson: Well, we're starting to close out 2008, wildest year in my memory and I go back quite a ways, made dizzying highs and some dizzying lows we seem to be rallying up from, crude oil that is, sharply lower crude oil just reported. Worldwide the commodity bubble popped and after those July highs and now we're dealing with the aftermath. What do you see ahead globally in terms of commodities going forward?

Newsom: I think as we go forward as you mentioned one of the most interesting commodities is the crude oil market. We've seen just a complete collapse in demand where we're not only seeing a decrease in demand for the product itself but we're seeing a decrease in demand from the investors. They have just been washed out in the global financial problems that we've seen. So, I think going forward into 2009 the commodity that is going to garner the most attention is, of course, crude oil. But we've seen here recently and we'll talk in more detail here as we go forward the grain markets and some of the livestock and some of the ag commodities as a whole are starting to see a bit of a rebound in here and that goes back to the old adage that as we go forward in 2009, as the piece just talked about, the world is going to want to eat and that's going to keep some support in these agricultural commodities.

Pearson: I've been out all around the country speaking the last three weeks, Q&A portion every time it comes up farmers are saying why is diesel still so high compared to unleaded fuel. What do you tell those people?

Newsom: Well, the diesel market is a bit different than, say, gasoline. Gasoline the demand has just dropped off incredibly from 2007 to 2008 and going forward into 2009. Total demand for gasoline continues to come down. Part of that is due to ethanol offsetting some of the demand, others is we're just not driving as much or we're being more efficient in our driving. So, we've seen the gasoline demand just cut sharply where we haven't seen that as much in diesel fuel, we don't have that replacement, biofuels isn't as big of an issue right now as far as displacement as what we've seen in the ethanol. So, you've got better demand right now in the diesel market than you do in the gasoline and that's one of the reasons for the discrepancy in the price movement.

Pearson: A little bit less of an offset with soy based biodiesel, while still popular not getting quite the ground that ethanol did. So, let's talk a little bit about what's happening in our commodity markets and get the fundamentals of what's going on there. Let's talk about the wheat market first. You're a Kansas boy and I know you track wheat very closely. At this stage of the game should we be making some sales on wheat? We've had a rally.

Newsom: Yeah, I think I'd sit back a little bit. I like what I'm seeing in the wheat market. It looks like we're putting in a bit of a low here, hearing some reports off the floor that wheat is becoming one of those markets that people are going to start buying into, the spec side of the market is going to start buying into going into 2009. There are some things coming together that look pretty good for the wheat market right now. Now, I'm still not a huge fan of supply and demand. We're still pretty slow on the export markets so from a demand point of view for overall wheat still a little bit slow. But I think we're coming around a bit. I think we're going to be able to rally this market so I think I'd sit back and wait to see in the Kansas City market if we can get up in that $7.50, $7.70 area on the front month futures, possibly even up $7.80 to $8.00 we might be able to make some sales up there in the next few months.

Pearson: Of course, weather is always such an issue in our U.S crop and as you look across the Wheat Belt right now what are you seeing?

Newsom: Right now there's always the talk of winter kill in the wheat. Well, it's winter wheat. This has been an incredibly harsh, cold winter. We'll have to wait until spring. Going into dormancy and everything everyone was talking about the great condition of the wheat. We've had some moisture over the fall so I don't know that it's a huge issue yet. But if we start coming out of dormancy this next spring and we actually do see some episodes of winter kill going in I think it's going to help to support the market a bit and I think we're going to see some commercial buying coming in on that.

Pearson: But we're still a ways away in your mind from making sales?

Newsom: I think so. I think we can sit back and wait for a couple of months, wait to see what the market does.

Pearson: We've seen the basis firming in other commodities. I haven't tracked wheat as closely. Has that firmed as well?

Newsom: A little bit but some of that was due to the low futures price. Again, we're not seeing that input from the strong export demand that is helping to push merchandisers to strengthening their basis level. So, we really aren't seeing that. Now, we're seeing some of that in the spring wheat but the winter wheat not as much because, again, we just need to see that demand start coming back, need to see it pick up a bit. If the dollar starts to lose some of its steam we could certainly see that.

Pearson: Worldwide production for 2008 and into 2009, this current wheat crop, worldwide are we going to see an increase in acreage?

Newsom: That's one of the issues that is hurting the wheat right now. We talked about the bearish supply and demand situation and wheat is a very worldwide crop and we see huge world production. Now, again, what is the debate going forward into 2009? Are we going to see fewer acres? Are we going to see more acres? Right now it's a bit of a toss up. I think the winter wheat acres actually are looking pretty strong right now. The acres that we had in 2008 we may see a bit of a reduction for the 2009 crop but with the carryover that we've got it's not really that big of an issue at this point.

Pearson: So, we're looking forward to a big crop and decent prices as well, maybe in the $7.80 range hopefully.

Newsom: Yeah, I think so. I think we're going to see an opportunity to get some new crop done.

Pearson: Let's talk about the corn market. USDA's last report in December showed that they were -- we talked about this in the very opening of the show and we want to get to this whole issue of ethanol demand -- USDA trimmed it by about 300 million bushels. Obviously we've got bankruptcies with VeraSun, we've got several plants that have gone dark. What is your take on ethanol going forward? Obviously prices on the board are very low for ethanol as they mirror what's happening in crude oil. What do you see and what are you punching in for demand for ethanol for 2009 as we look forward to the next year?

Newsom: I think we're still going to see the ethanol demand. One thing we haven't done, we haven't removed the renewable fuel standards, so the demand is still going to be there. Now, where the supply comes from is certainly going to change hands and that has occurred. It's just a normal business cycle. The ethanol industry is going through a normal business cycle of expansion and contraction, right now we're in the contraction phase. So, I think we are still going to see -- even though USDA reduced its 2009 numbers a bit for 2008-2009 numbers for ethanol demand it's still over what the 2007-2008 numbers were. So, we're still seeing growth in the industry, they just trimmed it back a bit. So, I still think we're going to see it, I think it's going to be a viable industry going forward and maybe just not as fast, it's just not going to move as fast as it has over the last three to five years and it's going to slow down a bit.

Pearson: Several schools track these input costs, Mike Duffy up at Iowa State and others around the Corn Belt, input costs are up dramatically even though we have seen fertilizer prices drop at the Gulf, in terms of at the farm level we really haven't seen much of a break yet, seed costs are certainly higher, diesel as we talked about earlier stronger. They're talking about a $4.25 or better break even on corn and we're not there yet.

Newsom: No, we're not and that is an issue, kind of an uncomfortable situation for producers going forward as we're sitting here in the wintertime trying to determine what are we going to plant next spring. But if we look at the market and if we look at kind of how these things have been moving over the last, say, three to four weeks it looks like corn is getting ready to start its seasonal rally that we see normally that lasts up through the planting season. So, I think there's going to be some opportunities going forward where not only is the old crop market going to look better but the new crop December contract is going to get over those break even prices even adding in those higher input costs. I think it's going to provide us some opportunities this spring to start locking some in and if we have a year where the weather actually starts to cooperate that's going to help us even more because yields are going to bump up and the cost per bushel then could go down a bit.

Pearson: So, in terms of corn sales where do you stand? What are you seeing ahead for the producer maybe who is carrying corn over into the New Year?

Newsom: '08-'09 I'm still about 50% done, some maybe up to 70% to 80% done. I'm still pretty comfortable with that because I think we're just getting ready to start rallying again and I don't want to hurry into any sales at this point because I think we've got an opportunity over the next couple of months. New crop, again, I think we're going to see us get back up into that $5.00, $5.25 possibly depending on acres and weather problems a bit higher than that, $5.50 and so on, so I think we're going to have an opportunity again during the planting season rally to make some new crop forward contracts as well giving us a bit better price than what we're looking at today.

Pearson: Let's talk about soybeans and a lot of the same issues there. It's such a global market now with the two hemispheres producing. South America is still such a big factor. What are you hearing down there?

Newsom: Overall the soybean market actually looks quite bullish right now if we look at the supply and demand situation. There's still very strong demand. So, even with strong production or large production coming out of South America and a good crop, you averaged a better crop than we had in the United States, we're still looking at a bullish supply and demand situation. Freight is relatively cheap right now with the downturn in the energy complex. So, we're seeing some very strong demand for U.S. soybeans worldwide. I think that's going to continue and I think that's going to help make soybeans the leader going forward. They certainly seem to have been over the last couple of weeks, as money is starting to come back into the soybean market, I think it's going to allow it to continue to lead and I think the better part of the rally is still going to come in the soybean complex and particularly from soybeans.

Pearson: What would be your price target then on soybeans for this spring? Those are usually our best times to make sales anyway.

Newsom: Yeah, right now given that the supply and demand is more bullish than we're seeing in the other markets I'm looking for a bit better of a rally, possibly up into the $12.00, $12.50 range on the nearby futures contract. I do think that's a possibility particularly if we start to get into a tightening situation. Let's say the production for '08-'09 wasn't what it's said to be at this point and we start to lower our ending stocks back below 200 million bushels possibly getting back into that 125 million, 150 million I think that's going to put the spurs to the market and it's going to really help it to rally. So, I'm looking for some pretty big things this spring in the soybean market.

Pearson: Real quick, the cotton market, sort of dependent upon exports and obviously the acreage issue is still a big one with cotton. Will we see cotton acres continue? Will we see more soybean acres? Being tied together the way it is what is your outlook for cotton and cotton prices?

Newsom: I like the cotton market right now. It's got a nice little rally going, again, we've got the fundamentals turning more bullish. I think it has to do with the acres, I think it has to do with demand but, again, we look at that carry in the market and it's about to go to par possibly going to an inverted situation before too long. I think that's going to provide us some support. I think we're going to be able to get this cotton market back up into the 54 to 56 cent range. So, again, I'm looking for a better spring than what we've lived through here over the last few months. I think cotton is one of those markets that is finally turning around.

Pearson: Maybe overdid on the down side? Maybe come back on the other side?

Newsom: I think so, I think it's starting to attract some money because it did get a little bit oversold.

Pearson: Let's talk about livestock. This fed cattle market we certainly saw some improvement here in the last ten days but we've got a long way to go especially based on the herd size that we have out there.

Newsom: Right, it's been an interesting situation where the market has been under all this pressure here over the last couple of months despite the months leading into it, all these low placement numbers and everything else that we were seeing. I still think that's going to come into play at some point. I think it's going to allow the market to start to rally but I would not be a bit surprised to see the February contract get back up into the 90s, test that $95, $96 range. I think it's a good target for the fed contract because I don't know that the numbers are all there and if demand can stay strong I think we're going to see the cash market -- the cash market is going to have to respond to this type of situation. It hasn't yet. I think we'll have time for it to work yet we have to start to bring some money back into this market but I do think it's there.

Pearson: The calf market also, of course, has seen some pressure. Typically when we get weak corn prices we see the teeter-totter effect of higher feeders, not the case in the fall of 2008.

Newsom: Yeah, what we've seen in commodities as a whole, you talked about it earlier, is that nobody wanted to be in any of the commodities and despite the fact that corn was coming down feeder cattle came down as well. Now, if some of this cheap corn was locked in on the feed side I think that's going to create increased demand for feeder cattle later on so I think we're going to see this underpinning of support coming back into the feeder cattle market as well.

Pearson: Let's talk about hogs. Again, it was a challenging year, not really a terrible year in terms of dollars and pork sales, decent export markets. What is ahead for the hog industry?

Newsom: I can't hope but think it's going to get better particularly if we start to see a turnaround in some of the other markets. But the thing with hogs where these other markets have started to show that they're trying to go higher hogs are still wallowing around down near their lows. As long as that February contract can hold above $60.50 and it did again this week we might be able to start building this base of support, might be able to start bringing some buyers back into the cash market. That's what we really need. We need this cash market to turn around. We've got good export demand. We'll see this cash market turn around and I think we're going to hopefully over this next quarter, this first quarter of 2009 that we can see a bit better market than what we're finishing 2008 with.

Pearson: Still a good time to get feed needs covered?

Newsom: I think so, yeah. With the way the corn market looks like it's turning I would certainly start getting some 2009 needs covered.

Pearson: Okay, so hopefully producers can take advantage of that and we could see livestock producers return to some profitability going forward. Darin Newsom, as usual we appreciate your insights. That will 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 visit the Market Plus page at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and, of course, the very popular Market Plus feature absolutely free right there at our Web site. And be sure to join us again next week when we'll look back at the year that was and examine the outlook for rural America in 2009. Until then, thanks for watching. On behalf of everyone at Market to Market, I'm Mark Pearson wishing you a happy holiday.

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