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Market Analysis: Nov 07, 2008: Sue Martin Analyzes Choppy Commodity Markets

posted on November 7, 2008


The Agriculture Department will release its November crop production report next week. In the meantime, private estimates are calling for a smaller corn harvest. Nevertheless, grain prices followed equity markets lower.

For the week, December wheat lost more than 15 cents while the nearby corn contract moved 26 cents lower.

Trade estimates for soybean production were reduced to just over 2.9 billion bushels, but prices also trended lower. For the week, the November contract lost 40 cents, while the nearby meal contract was down $1.30 per ton.

In the softs, cotton prices also were under pressure this week as the December contract posted a loss of more than $2.00.

In livestock, December cattle gained 10 cents. Nearby feeders moved more than 30 cents higher, and the December lean hog contract gained 60 cents.

In other markets of interest, the Euro lost 12 basis points against the dollar. Crude oil was down $6.77 per barrel. Comex Gold gained $16 per ounce. And the Goldman Sachs Commodity Index lost more than 30 points to close at 419.35.

 

Market Analysis: Nov 07, 2008: Sue Martin Analyzes Choppy 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 back with us.

Martin: Thank you, Mark.

Pearson: Well, it's been a global meltdown, a global recession, a global pullback, crude oil is down over 50% now, corn down over 50%, beans are down over 50%, it looks like the air has come out of the commodity markets broadly. We're chewing through this harvest for corn. We have wheat producers who are nervously watching what this winter wheat is going to look like from a production standpoint. Sue, just broadly -- we look at the strength of the dollar as the world, again, has turned to the dollar in times of a crisis. What is this all going to spell for us down the road as we go into 2009 in the broad commodity context?

Martin: Well, I'm kind of glad you started that way because the one thing we have to remember is that as our government and our fed and treasury is infusing money into the economy having bailouts and you name it they're printing dollars at a record pace and usually it takes about twelve to eighteen months for this money to filter through into the economy and to reach and have the effect that it needs to have. So, through the process of this you have banks that are able to get lending, have money for lending but they aren't feeling comfortable at the moment to lend and so they're just sitting on a lot of money. At some point this is going to loosen up and when that does you're going to start to see a big demand that has been pent up for commodities come at us. I've been in the business 36 years and there's been a saying forever that low prices, the cure for low prices is low prices and this is true. When you look at what is happening right now with crude having fell like it has over 50%, went from $148 down to we just broke the $60 level here this past week by a little bit, that's been a pretty huge decline in percentage. But what has happened is that what this does is as it comes down you have companies be it whether it's in the U.S. or in China or elsewhere that's not making as much money and all of a sudden they aren't venturing off into new exploration or expanding businesses or opening new businesses, they are contracting instead of expanding. And in the meantime, yes, demand maybe slows a little bit and then all of a sudden you see these cheap, cheap prices and people start to say, gee, this is a bargain, this is a good price and all of a sudden they start to come at the market. Now you've got demand coming at you at a time when you don't have good supplies and the market explodes. And I think that down the road that's what we're going to see is that we're going to see a bout of inflation that hits us but for now we're still going to work through this. I think that overall we still have maybe some lower levels to hit here yet this month be it rather it's the Dow or cattle, maybe not cattle so much, they might fall back and test some levels but the grains especially we're just not done yet. I think that we have markets that are going to still sink a little bit and we have to remember that President-Elect Barack Obama does not take office until January 20th so you have President Bush, it's almost like a lame duck president and so you've got all this pot just molding here of all this uncertainty and that's going to still leave us to be vulnerable yet I believe as we go through November for some more lows yet to come. Then I think we start to settle down and, of course, usually we get kind of quiet anyway as you go towards Christmas and I think this year will be one of those traditional old Christmas Decembers where the market gets kind of quiet and it just doesn't do much and then we roll the year over and maybe we start to get a little more bout of optimism as we have President-Elect Barack Obama take office. And in the meantime we'll be hearing more about his thoughts of his cabinet and that type of thing to see if we can build some optimism.

Pearson: One thing that has been a powerful driver for the farm economy has been ethanol. On the show we talked earlier about the VeraSun bankruptcy, some of the other smaller firms have limited production or ceased production so are you concerned as you see that going forward for farm demand?

Martin: Well, to some degree, yes. But what's going to happen is that companies like VeraSun, large companies like that and even some of these smaller companies you're going to see where they're going to be swallowed up by large outfits. In fact, I've already heard rumors of VeraSun. So, at some point our business is still going to operate and VeraSun has said that they intend to operate all their plants that are up and running at capacity. So, they're intending to operate but now it's getting the confidence from the farmer to be willing to sell them the corn under the condition that they are. But the situation I see is that we're going to be producing DDG. In the meantime, of course, crude falling like it has has made ethanol maybe not quite as profitable and if it wasn't for these subsidies ethanol plants would close by the dozens. But you've got the DDGs there for corn to compete against the corn per say and in the meantime you've got a lot of feed wheat coming at us and so corn has got its share of issues to deal with but there's something on the horizon here that people aren't looking at and I think this is something that could be very big down the road and it's what is going on in China. All this melamine that has been showing up in different products, they closed 238 processors because of illegal feed that had melamine in it and needless to say they are disposing of protein because of this. Well, we still don't know how far this reaches in ramifications, how much it's gotten into the food chain and, of course, they'll be very slow to talk about it. But the big ramification is they have played it down and yet 238 processors is a pretty decent number and in the meantime it's all this that we're pitching out the door that has to be replaced to feed people down the road and I think you're going to have a huge pent up demand coming at us down the road for corn. Now, we look at corn and part of the problem corn has got right now is it's not getting harvested easily and it's not drying down easily and, of course, farmers are just going to have to go get it now because it isn't going to dry down any further. And in the meantime you've got this sort of like when we had Hurricane Katrina and we weren't getting stuff exported, well we're not getting corn exported and you're in your first quarter of the marketing year and that is usually when some of your biggest exports are. So, we're losing that business for the moment because we just can't seem to get it out of the field and get it into the hands and farmers are not happy with the prices and they have built a lot of storage. So, the first half of this crop certainly went into storage and now the tail end, a third, maybe the last 40% does find its way into the elevators so basis levels soften up a little bit but in the meantime I believe corn has got another low yet to come. I look for some bottoms in this corn market around the 27th. Well, around Thanksgiving I think beans and corn will put lows in the grain market.

Pearson: I want to shift gears and talk about the wheat market and what you see happening there. You know we had a situation the last couple of years where we had the problems with production, we ran into wheat being very tight causing prices to be dramatically higher unrelated to the biofuels and the other things that were happening out there and now we had a decent harvest in 2008 and decent conditions worldwide.

Martin: Well, that's true and we're finding that right now we're dealing with a lot of competition out of Russia and various areas. But Pakistan we're giving them $200 million towards food and you've got in this government report coming out here this next week on Monday we believe that the USDA is going to lower the Australian crop by 1.5 to 2 million metric tons and we think they'll lower the Argentine crop by a half to maybe 1 million metric tons all because of weather. And so not all totally is well with the world and yet if you look at these carryouts they're not burdensome. These are low carryouts because we have gone through one good year of crops, we still need to have another one under our belt. So, we can't afford anything to go wrong over the course of the next year or we're going to be back in the same boat we were. You've had the world get used to eating better and you can't crank that back very easily. And you've got China with 9% growth, which is a drop off of the 11%, 12%, 10% they've been at. The economists say that China can not go under 8%, that's the level they have or benchmark they have that China needs to hold in order to keep people at peace in their country and keep people working because they have all these peasants moving into the cities looking for jobs. And so when you've got this happening that is a demand for food that you're going to always have. So, our carryouts worldwide whether it's corn, wheat or beans it's not burdensome by any means.

Pearson: So, wheat prices at this stage of the game, first quarter next year what is your outlook?

Martin: Well, I think that what's going to happen is wheat is going to kind of fold right along with the rest of this and so as we go towards the latter part of this month I think wheat comes down right along with the beans and corn. It's in a little different phase of its crop year but I think it's going to end up doing that. Then when we get everything settling down now we go into a trading range and we work it back and forth and massage and then as we get into the New Year we start to work our way and start coming up.

Pearson: So you wouldn't make sales at this point?

Martin: No. I would not make sales at this point still realizing we've got a little lower to go but in the meantime Dec. corn might get down to $3.15, $3.25, last year's lows, we may see that. The beans might take out $8 and go to $7.65 or $7.64, something like that. But in the meantime I think that there's better days coming, there will be better prices. We have to remember we have a year that is for the record books. If you look at oscillators as a technical indicator you made the highest level on the oscillation index that you've had in over 40 years and you also made the lowest level in over 40 years. So, you've had an extreme volatile year. That will settle down. Your index funds are still holding about 16.7% of the bean market on the long side but as we get down the road there's better things coming. You've had a huge range. It would only seem natural you'll retrace some of that range.

Pearson: So, you think corn could go back to $3.15?

Martin: I think it can. I think $3.25 to $3.15 and if that level comes at the same time or coincidental with around Thanksgiving it should be a beautiful bottom in the market.

Pearson: What about as you look forward to the first, second quarter of next year? Some of that pent up demand start to push things forward? Obviously corn is tied to what is happening with crude too.

Martin: Well, it is and I think that what we'll see is that the demand comes at us the one side that you've got to remember is that farmers are going to have a tax issue this year and there isn't a lot of ways they can deduct this year because they've bought equipment now, they can't get more equipment so that's always been a classic to help lower their taxes. But as we go towards March 1st I think the thing we have to remember is you're traditional. We're going to have this February break into March where we tend to put a low in there because farmers are selling grain in order to pay bills and make their farm payments or whatever and I think that's what we're going to see this next year. So, there is going to be a dip down in there and then maybe we come right back out of it into the spring timeframe, April to May. Do I see a June, July high next year? Absolutely not, we're in a down trend.

Pearson: Let's talk about soybeans. What is your outlook now for soybeans for prices? They'll follow that break in the first, second quarter of next year?

Martin: They should. I think for one thing we have a market there that is a little bit on the better side because of China's need for protein. And see, right now it's all about China again because by the time you figure the cheap freight rates that we now have in the world and the fact that they subsidized their prices to farmers at such a high level they can actually import beans from the U.S. at such a cheap rate compared to buying them from their farmers. So, they are importing. And we've seen them in our market pretty aggressively. The other thing on beans is we need to look at South America and while the planting progress is on target, maybe 1% ahead of a year ago we do see that their crop is going to be less planted, they're going to have less area planted this year and so we look for the USDA this next week to lower Brazilian production by one million metric tons. We believe that Argentine production will probably stay where they've got it, where the USDA has pegged it. But in the meantime we think that between the cutback on fertilizer because of the credibility situation they have had in Brazil as well and because of the lowering of acres we think that the production in Brazil is going to be down and that's just going to send more business back to the U.S. So, as we get through the turn of the year we're going to be fine until they start getting that Brazilian crop out of the fields. But in the meantime the demand is ours.

Pearson: Let's talk about the cotton market, again, a lot softer this week and it comes right back to China.

Martin: Well, it does and China is the largest importer of cotton, they are also one of the world's largest growers of cotton but the problem is cotton is so low, 42 to 45 cent cotton I think there's room for cotton to go back to 60 cents. And so as a cotton producer I would not be selling any cotton. Here again cotton may be one of these markets that falls into a low in the later part of the month because cotton is going to lose more acres again this next year and that is something we're going to start seeing hit us as we turn the corner out of November into December we're going to start talking acres and we need a lot more corn acres and then you've got cotton following by the wayside in between all that so I think there's room for cotton to show improvement.

Pearson: Let's talk about the livestock market. You mentioned livestock might be one that may be under some pressure here in this final quarter of the year on fed cattle.

Martin: Well, I think so. We know that we have heavy weight cattle. The one good bright light in the cattle market is we had good export numbers come out this past week or so and then on top of it you've also seen the product holding together so we may have a cattle market that it's had a $7 rally off the lows in a short time but it's also very seasonal to rally right now. I tend to think cattle will still turn and make a sell off and come back down in towards, again, the Thanksgiving timeframe. But one thing I have noted is that it doesn't matter if it's cattle, corn, wheat, soybeans, soy meal, the stock market I have a timing indicator that I use and I don't often talk about it on the show but occasionally I have over the past and that indicator is so rock bottom on everything which seems logical. It has not turned yet, it's very low and the floater mechanism within it has turned which is giving an indication that we may be close to a bottom in the cattle but yet I think you're going to come back and take a look. The Dec. cattle, fed cattle should fall back down towards the 90 cent level. We could still see a chance to look at 86 cents again but I tend to think -- and the cattle will break hard -- when this starts rolling towards the latter part of this month then I think we're going to have a lot of emotion with it and cattle will probably feed backwards with it and then they'll catch and then I think they too will start to heal through December.

Pearson: Typically that feeder market has moved the opposite way of corn and it hasn't' done that so far. Do you think the calf market is going to really start to strengthen here eventually obviously if we get down towards $3.25, $3.15?

Martin: Well, I think if you get corn down in that area that's pretty cheap feed so that should be one incentive for the cattle feeder to want to buy these calves. And, of course, you've had good moisture throughout wheat country so the pastures are good. I think the credit situation if we didn't have that feeders would be higher than where they are today. I think that will start to change too. And as we go towards spring hopefully we've got better times coming that they'll want those feeder cattle.

Pearson: Hog market?

Martin: Well, the hogs I think are seasonally about to put a low in. Usually around November 10th, 11th you'll have a low on hogs in a traditional old-fashioned year. That said all along this year was a traditional year it's just you had a lot of this outside economic fundamental stuff hitting us that was very emotional and volatile. But your timings are all very traditional and I would say your hog market is about to put a low in plus we've noticed the product start to stabilize, hams especially.

Pearson: So, some positive news on the pork front maybe going forward despite these bigger numbers. We'll leave that for another time. As usual, Sue, appreciate your insights very much. That will wrap up this edition of Market to Market. Now, before we go we want to invite you to share your perspective on rural issues at our new Market to Market blog. Of course, you can also hear more from Sue on where these markets just may be headed by clicking on the Market Plus page. You can view streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments all free at our Web site. And be sure to join us again next week when we'll examine the market impact of the agriculture department's November production estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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 because sound information plus consistent yields can help farmers stay on track. The people who bring you Pioneer brand corn hybrids proudly support Market to Market.

 


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