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Market Analysis: Oct 03, 2008: Darin Newsom, Market Analyst

posted on October 3, 2008

The Agriculture Department will release its latest crop production estimates next week. However, private estimates from FCStone and Informa Economics this week both curtailed their projections on the U.S. corn crop. But the reductions weren't enough to reverse the freefall in grain prices.

For the week, December wheat plummeted more than 75 cents and the nearby corn contract moved nearly 90 cents lower.

Private estimates also cut their soybean estimates, but did little to ease the sell-off. For the week, the November contract fell nearly $1.75, while the nearby meal contract declined more than $50 per ton.

In the softs, cotton continued its downward trend, with the December contract losing nearly $3.00

In livestock, October cattle lost $5.35. Nearby feeders posted a similar loss of $5.13, and the October lean hog contract moved $3.21 lower.

In other markets of interest, the Euro lost a whopping 794 basis points against the dollar. Crude oil lost more than $13.00. Comex Gold declined more than $55 per ounce. And the Goldman Sachs Commodity Index lost nearly 75 points to close at 583-even.

Market Analysis: Oct 03, 2008: Darin Newsom, Market Analyst Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, it's good to have you with us. We talked at the open of the show about this global financial crisis, the bailout plan turned down by the House Monday, they come back, they add $110 billion worth of goodies to it, it passes on Friday, the stock market goes lower, commodities are under pressure all week, a little bit better on Friday. How has this global financial issue impacted wheat, corn, soybeans, cattle and hogs?

Newsom: First off from the technical speculative side we have seen massive liquidations in the commodities. The numbers you just ran through from corn and cotton and crude oil and heating oil and all of these contracts we've just seen incredible liquidation. The CFTC report this afternoon showed that as of Tuesday, the end of the month of September we saw 20,000 contracts liquidated in corn alone just from one Tuesday to the next. So, this global meltdown you're seeing, these financial problems that we're seeing worldwide is spilling over into commodities because no one wants to hold these as investments any more. They don't have the luster that they once did and it's not a blight to quality, it's not one of those things where you're seeing money come out and then looking for a safe haven. As you just said gold was down $55 for the week which is something you just normally don't see. They're just bailing out of everything that they can right now turning as much of this into cash and then waiting to see what happens next.

Pearson: So, with that in mind we're not trading market fundamentals per say these days?

Newsom: And that's the other side of the corn, when we do start looking at fundamentals they could be interpreted as being bearish now for quite some time but the most recent reports that we're seeing -- we had the quarterly stocks report and both corn and beans came in a little bit larger than anticipated as of September 1st -- this is kind of confirming what we've been looking at with these huge spreads that just did not seem to support the idea that these markets should continue to go up, up and up so what we're getting now is a more bearish sense of the underlying fundamentals and then if we add these two things together world demand can start coming down now because of the problems causing more fundamental pressure in the market as well.

Pearson: And we also mentioned we've been tracking the Euro since it began and this was the biggest one week move in favor of the dollar since the Euro came about on this program. So, we have a strong dollar that's got to start slowing down that export scene doesn't it?

Newsom: It certainly could. The export numbers week to week have been looking pretty solid still, you have to have some hits and misses here and there. But the Euro is under incredible pressure, they are talking about starting to lower the interest rates, European interest rates but the U.S. dollar is not strong, the fundamentals as we know are still weak for the dollar but just because the Euro is coming under pressure we've seen the dollar rally back over 80 points approaching 81 here on Friday, just incredible strength and yes, this is helping to put additional pressure on the commodities, it's helping to raise this cloud of doubt whether or not we will even meet what is being projected now for '08-09 exports.

Pearson: Let's talk about the wheat market, a disastrous week as far as futures are concerned. I'm hearing a little bit of both ways on next year's crop and still not a lot of crop out there.

Newsom: No, the problem is if we have any ending stocks in wheat we've got basically too many at least where the world is concerned. And the biggest thing probably in the wheat market now is still this $2 under basis, I think it's like $2.20 right now in the soft red winter market. This is still a broken market. You and I have talked about this before. This market isn't getting any better and this weakness in the cash market is going to continue to hang over the futures, help to pull it down and not provide any support. So, if we want to look for some fundamentals in the wheat we may not have as much as we thought we did at one point but the cash market is still telling us wheat futures are too high.

Pearson: Let's talk about the corn market this week, again, a rough week for corn. At the same time we're just really weighing in on this crop in the major Corn Belt, major corn producing areas and the verdict anecdotally is it's an okay crop, it's not a great crop.

Newsom: That's right. Even as you pointed out the FC Stone and the Informa numbers heading into next Friday are seeming to be backing off a little bit but on the other hand we saw the quarterly stocks get bumped up to over 1.6 billion bushels. So, we're certainly not in a tight supply and demand situation in corn either. It looks like we've got some room to come down. December is probably going to test the waters before all is said and done and then see what happens down there, see if we start to generate this demand in this demand market that we've been talking now for two years, see if it's still there, see if it still holds water, see where we can go from there.

Pearson: The biofuels front, ethanol front is that where this is slowing down? Are we seeing some slowing from the ethanol plants? Is it just a combination of factors?

Newsom: I think so because one of the things that we're also noticing in this global slowdown the U.S. has seen slackening of demand for petroleum for gasoline, for diesel and so on the entirety of 2008 as compared to 2007. Now, you expand that out worldwide and there's talk that we could see some decrease in petroleum demand worldwide. This has been affecting the ethanol, it's been affecting biodiesel so those profits aren't what they once were, certainly not what they would be hoping for at this point. So, I do think that's helping to put pressure on the market and it should continue.

Pearson: Let's talk about soybeans, you mentioned soy based biodiesel, that seems to be the one product that the candidates are mentioning as they go around the country and talk so there must be some support there at that level. But what do you see ahead for soybean prices? Again, the word that I'm hearing is that corn is okay but the beans are subpar from, again, Illinois and parts of Indiana, parts of Iowa that I've talked to, parts of Nebraska, that's the report I'm getting and we're kind of seeing that in some of these early looks.

Newsom: Right, if we kind of tie everything that we've talked about together here it looks like world demand is going to start coming down. I've been hearing talk off the floor that we could see from the projection right now over the course of time 50 million to 120 million bushels coming off that 1 billion bushel projection. On the other hand quarterly stocks were again bumped over 200 million bushels. So, what we're left with is the possibility that by the end of 2008-2009 we could see soybean ending stocks in the U.S. growing to over 200 million, 300 million bushels. That's not a huge amount but enough to offset all this idea that we're in a short supply situation. We saw November futures break below and close below $10 for the first time in almost a year. It certainly looks like this market still has room to come down, liquidation hasn't been quite as heavy in this market as it has been in corn so once that really starts to hit we could see some further pressure.

Pearson: We had some very strong cash markets in corn a couple of weeks ago before the new crop started coming. What are you seeing now in cash markets for corn and beans?

Newsom: Basis on the corn market is holding relatively well in that national average, 40 to 45 under now. I think that could begin to improve if the December comes under as much pressure as what I'm anticipating. Soybean basis has been a wreck. We've seen it go from about 40 cents under at the height of where the supply problem was really hitting us, we're down around 85 to 90 cents under right now on national average basis. So, as we get closer to harvest and the idea that we're going to have these cash beans coming in and demand has been slowing down it's certainly weakening the cash market despite the pressure the futures have been under.

Pearson: Let's talk about the cotton market real quick. Again, that was a big one under pressure this week and sensitive to the dollar, sensitive to so many other issues than the rest of agriculture. What do you see ahead now for cotton?

Newsom: Interestingly enough we've talked about all this selling coming into the market and we've actually seen non-commercial traders go short in the cotton market. It looks like the December is really struggling here in the upper 50s, could back down to about the 55 mark. But if that doesn't hold then all of a sudden we're starting to look sub 50 on cotton later on this year. So, again, a market that seems to be in trouble, doesn't have much support coming from the underlying fundamentals and this could allow it to continue to work lower.

Pearson: Let's talk about livestock. Is it time to cover feed needs in here?

Newsom: I don't think so. I think we could certainly start looking it but the pressure in the market to me is strong enough both corn and soybean meal that we should have better opportunities over the next four to five weeks to start locking in our needs.

Pearson: So, no big hurry.

Newsom: I'm not in any big hurry, no.

Pearson: We need all the breaks we can get. Fed cattle this week a lot of pressure. What is your outlook?

Newsom: More pressure. We saw the October under pressure, the December is breaking down, the charts they look weak, fundamentally you still have this idea that we're going to be short cattle here in the late fall and winter but the market just like so many others is just not paying attention to the fundamentals. I think we're going to see more pressure coming into cattle, would not be too surprising to see the December work back to about 90 and then close in the 96, 97 range here on Friday. So, again, more pressure in the futures, possibly more pressure in the cash as well.

Pearson: Let's talk about the calf market. I'm hearing these stories, this is anecdotal, that banks are kind of trimming back on what it is they want to put forward for cattle feeders at this stage of the game, their normal lines of credit part of this credit freeze that we've been hearing about from this financial crisis. Is that part of why we're seeing this calf market under the pressure that it's under?

Newsom: Yeah, I think it we look at the financial the way that's playing out and then we add in what some of the fears are in this cattle market it's not all that surprising at this point that we're seeing this calf market struggling as much as it is here in the short-term.

Pearson: What do you tell cow calf operators right now?

Newsom: That's a great question because I was at some of the farm shows here over the last couple of weeks that was one that kept coming up. I really don't have anything good to tell them at this point. As cattlemen usually do they try to ride this thing out. I think if there is a market that could possibly come back in 2009 it could certainly well be the cattle industry. So, ride out through the short-term, let's see if we can start to heal some of this stuff up in the coming weeks and hope for better markets in '09.

Pearson: Let's talk about the hog market as we haven't talked about it much lately because of all the other interest in the other markets. The vertical integration occurred in hogs but we kept waiting for this big liquidation to occur this fall in the U.S. hog market. USDA's hogs and pigs report showed it really didn't happen.

Newsom: No, it hasn't. As you've said, so much of this is due to the vertical integration that we've seen in the hog industry, it just does not allow for the type of liquidation and expansion that we've seen, these cycles that we've seen in the past. So, what this has allowed for is enormous slaughter numbers week in and week out. We see some support coming into the cash market at times but overall just can not really maintain the strength in cash helping to keep the futures under pressure as well. You're right, we don't have this liquidation and if we don't have these smaller numbers that we were looking for in '08 I'm really not looking for them going into '09 either.

Pearson: So, your outlook cash wise on hogs what do you see?

Newsom: Well, I look for the market to stay under pressure because if nothing else the nervousness is being created in the financial markets and could cut people back on all types of meat demand at least through the balance of '08. Now, some of the livestock analysts that I've been talking to are looking for a better 2009 particularly in cattle but hopefully a little bit will spill over into the hogs. But I think heading into the end of '08 things aren't going to look all that good in the cash market.

Pearson: So, hold onto your hat, maybe better times for the livestock guy ahead but could be a rocky road to get there like the last three months.

Newsom: It may not be a lot of fun getting from point A to point B.

Pearson: Well, with that in mind as usual Darin we appreciate your insights and hope that you'll take advantage of these lower feed costs over the next few weeks, you had a good point there. That's going to wrap up this edition of Market to Market. Now, before we go we want to alert you to a new addition to our Web site. We invite you to share your perspective on rural issues at our new Market to Market blog. This week with just one month remaining until the presidential election we invite you to share your insight on renewable fuels. Of course, you can also hear more from Darin 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 begin a series of reports examining the politics of ethanol and other renewable fuels. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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