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Market Analysis: Oct 31, 2008: Virgil Robinson, Pioneer Hi-Bred International

posted on October 31, 2008


Grain prices moved sharply higher this week prompting some analysts to speculate that the worst may be over.

For the week, December wheat gained 20 cents while the nearby corn contract moved nearly 30 cents higher.

Soybean prices also rallied nicely with the November contract posting a weekly gain of 88 cents, while the nearby meal contract rose $4.70 per ton.

In the softs, cotton trended lower again this week with the December contract posting a loss of nearly $2.00.

In livestock, October cattle gained $5.90. Nearby feeders moved almost $5.00 higher, but the December lean hog contract declined $3.70.

In other markets of interest, the Euro gained 137 basis points against the dollar. Crude oil was up more than $3.50 per barrel. Comex Gold was down more than $12 per ounce. And the Goldman Sachs Commodity Index gained more than 20 points to close at 450.25

Market Analysis: Oct 31, 2008: 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, welcome back.

Robinson: Thank you, Mark. It's trick-or-treat here tonight.

Pearson: That's right, it's all Hallow's Eve day of Market to Market. We certainly had some tricks and treats pulled on us here in the commodity markets. Let's just go backwards, just broadly speaking worldwide a strengthening dollar, weak oil prices, substantially lower farm prices as we move through harvest season for corn and soybeans, a little bit of a bounce this week. As you look at all this, you look at agricultural trade and its global implications what is your outlook broadly for commodities going forward? What are the major trends that we can kind of start to see developing?

Robinson: I'll try maybe here one at a time, Mark. To address your question regarding the value of the U.S. dollar given the methods that I use I would be of the opinion the dollar is yet positioned to move higher over the course of time and there are probably a myriad of reasons as to why, many of which I'm not qualified to address. But given my method I think the dollar will track higher over the course of the next several months. Crude oil, at least in my memory, the largest monthly range I've witnessed in that commodity ever -- normally in a situation where you have a range of that magnitude it's not uncommon to follow that with a series or a period of kind of consolidation and perhaps that will speak to the issue of new liquidity in the systems as we understand our policy and other policies regarding cash infusion. So, a period of stability appears to be in the cards, at least in my opinion, with respect to crude oil. That clearly could lend some stability to other commodities including those that we visit about routinely and in that context it is not uncommon but rather more common than not through this window of time, this October period of time for both corn and soybeans to put together some type of seasonal low. And, again, while there are other factors that could be addressed here for the purpose of trying to bring to the attention of our viewers some semblance of rational the seasonality aspect I believe is appropriate here if for no other reason perhaps the use of some type of option strategy. Let's talk December '08 corn futures. Each of the last three weeks in and around $3.70 the market has held like a rock. So, applying this seasonal concept the observation we just made maybe purchasing a put at or near that value or the equivalent value in the March or May futures contract moving forward would lend some kind of a price floor to that commodity and give you the opportunity over the course of the next many weeks to discover what happens here in this complex market environment.

Pearson: So, that's a near term look right there. We'll revisit corn coming up in just a moment. In terms of the global activity sparked by this stronger dollar, have we started to see trade slow down much? Export news?

Robinson: Well, normally there's a longer lag period than just a few weeks. But in combination with the other events that you have addressed on the show I think it's kind of exacerbated that development. Clearly corn export sales to this point, which is early in the crop year, have been sub-par which leads most private analysts to the opinion that the USDA is obligated to address that in the November 10th supply and demand report and most are assuming they will in fact again lack another 50 to 150 million bushels off that export projection year over year.

Pearson: I want to talk about the USDA report and the correction that they made this month. But we mentioned the strong dollar, we're talking about the impact that has. I don't think anywhere that's more than certainly in wheat where we're so dependent upon exports and global trade. What is your take right now as far as wheat prices are concerned? What are you seeing ahead?

Robinson: Well, I think it can be as simple as acknowledging the fact that global wheat production, and this was documented this week by the International Grain Council, forecasting production of about 683 million metric tons, which if in fact accurate would represent about a 73 million metric ton year over year increase in production and clearly that has been a factor in the price discovery of wheat. Wheat has found its way into the feed markets in many select regions of the globe to the extent that it is valued below corn in instances as much as $40 to $60 a ton, which also probably lends credence to this idea that corn exports are likely to be adjusted lower here in the up and coming future.

Pearson: Let's go back to corn and talk about you mentioned an option strategy being one way to look at it. What about into 2009? We have some issues I want you to talk about. One, obviously the ethanol industry is certainly struggling, represents a huge demand for corn. Some of those plants could go dark, as we said here tonight it's certainly a possibility. That would certainly cost us some demand from that standpoint. We talked about the stronger dollar earlier. And we talked about a little bit of a challenge for corn exports. What is the up side? Should we be selling some '09 here?

Robinson: Well, in that context I think again there is a popular notion that has emerged here prior to the November 10 report and that is a reduction in corn exports and an adjustment in the forecast of corn used for ethanol production. And most private analysts are of the opinion that could be ratcheted down anywhere from 300 to 400 million bushel from previous or recent forecasts. So, the combination here of slower exports, perhaps a decrease in corn used for ethanol would swell the ending stocks number from its current projection upwards to something near 1.4 billion or 1.5 billion. So, if we in fact assume corn acreage to be about the same as it was this last season in combination with an increase carry over or carry in perhaps it reduces the urgency of increasing corn acres at least in 2009. And I think that in fact is the theme the market is currently employing.

Pearson: Let's talk about soybeans and your outlook for prices for soybeans at this point. All this hinges on what happens in South America, it's still awfully earlier down there isn't it?

Robinson: Good point and there is anecdotal information to the extent that there are dry areas in Argentina. There has been some concern about producers acquiring sufficient inputs to optimize their crop prospect. So, will the USDA acknowledge that next week or in ten days by adjusting resilient soybean production. My guess is there might be a modest reduction month over month but it would still seem likely to me given the incentive that was provided that producer base that they will make every effort to grow a large crop of soybeans in 2009. So, I would move forward with the assumption we're looking at something in the vicinity of 60, 62 or 63 million metric tons out of Brazil which, in fact, would be record large production.

Pearson: Virgil, at this stage of the game strategizing for producers maybe who haven't done much what would you recommend in terms of sales?

Robinson: I think I'd certainly wait and take a look at the new data on the 10th and in the soybean market we addressed kind of the macro there for a moment but internally or here in the U.S. big debate rages on here about the yield of the '08 soybean crop. I'm hearing both good and both quite poor. The models I am privileged to see are suggesting the USDA is currently on track with prospect of even seeing perhaps a small bump higher in that number I think is pretty strong. So, it would seem to me we have an adequate supply of beans, not a burdensome supply by any means, but an adequate supply. The cash markets are indicating at least in my opinion basis's firmed, carrying charges have narrowed, the return to storage is not nearly as attractive in beans as it is in corn. So, I think moving forward that rallies in beans, and there will be rallies in soybeans, will attract I think a fair amount of selling from producers and justifiably so.

Pearson: So, with that kind of an outlook we want to take advantage of the market when it's up. Can you talk about this cash market for soybeans because I'm hearing maybe some tall tales about there's some areas where cash demand for soybeans is extremely strong.

Robinson: I think it's maybe multi-functional there. There are areas where yields are disappointing and carry in stocks are relatively small and as a result of that processing margins have been fairly attractive up until this week incidentally which just reminded me of that fact and as a result the basis has narrowed dramatically in a very short period of time in their effort to source that physical commodity. It would be my best opinion unless there is a tax issue or another issue of that nature preventing producers in those types of environments from selling their production and then replacing it at a point in time I see no reason why one would not want to do that.

Pearson: Let's talk livestock, a big week in fed cattle, very exciting. Do we take out some technical points in this hedge cattle market? It sure looked like it.

Robinson: We had a good week, we had a poor month. In the month it wasn't particularly solid but to suggest one be an aggressive hedger at this point given these futures markets and prices I think would be untimely. I think the futures market over the course of the next few weeks driven by the fact that we will in fact see fewer live cattle, their weights are likely to continue to decline, there will be a point in time where this cow slaughter, beef cow slaughter slows -- I mean, it's at a pace now that's about 15% higher today than it was one year ago -- where there will be some type of recovery I believe in the futures market. I would use any combination of February, April or June futures less a basis that equals something in the mid to upper 90s to hedge production through that window of time. So, I'm looking for a recovery in the cash market back towards the mid 90s with an outside opportunity at seeing something near a dollar.

Pearson: Not bad prices. First quarter of next year what do you think we're going to see?

Robinson: Mid 90s would be my opinion and any opportunity to use that February or April futures contract less some type of historical basis that equates to about $95 I'd capture that opportunity to hedge those cattle.

Pearson: What about hogs, Virgil, what's going on there? Not quite the astounding week there on the hog market.

Robinson: Plenty of hogs, that's kind of the theme of things, very adequate supply, very competitive meat situation. The cold storage report brought to our attention a very ample supply of chicken, a very ample supply of turkey, a small increase in pork as well. So, there is no want for edible protein at this point in time and as a result the markets have suffered. Export sales remain okay but certainly have slowed in each of the last few weeks. Hog prices I think will be tested to move back into the low 40s the balance of this year, mid 40 and above I would use the combination of February, April and June live hog futures less a basis to hedge them.

Pearson: Good thoughts as usual. Virgil Robinson, thank you so much. That wraps up this edition of Market to Market. But before we go we want to invite you to share your perspective on rural issues at our Market to Market blog. Of course, you can also hear more from Virgil on where these markets just may be headed by clicking on the Market Plus page, viewing streaming video of our program and downloading audio podcasts of our Market Analysis and Market Plus segments all free at our Web site. And be sure to join us again next week when we'll examine the impact of November production estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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