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Market Analysis: Aug 22, 2008: Virgil Robinson and Walt Hackney

posted on August 22, 2008

Dry conditions over much of the Grain Belt this week prompted concerns over yields. And with the trade covering previous short positions, prices moved higher.

For the week, September wheat gained more than 40 cents and the nearby corn contract was up nearly 60 cents.

Soybeans followed the grains higher and surpassed the $13 barrier. For the week, the September contract gained $1.10, while the nearby meal contract was up $27.50.

In the softs, cotton put together a winning week, with the December contract posting a gain $2.55.

In livestock, August cattle were up 18 cents. Nearby feeders lost $1.05 and the October lean hog contract was down $1.80.

In other markets of interest, the Euro gained 103 basis points against the dollar. After a volatile week, crude oil closed just 65 cents higher. Comex Gold gained more than $41.00 per ounce. And the Goldman Sachs Commodity Index gained 15 points to close at 710-even.

Market Analysis: Aug 22, 2008: Virgil Robinson and Walt Hackney Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson. Gentlemen, welcome back.

Pearson: Let's talk about this, last week we kind of thought the bubble had burst in commodities and crude had dropped $30 and off we go. This week crude made quite a jump. Part of it was the Russian-Georgian situation I'm sure driving that but also the grains were up as well. Just globally commodities, are they back in the driver's seat, are the bulls back in the pen?

Robinson: I'm not convinced of that, Mark. It appears to me crude oil, gasoline futures, ethanol futures all in position to decline additionally and that would be my assessment of prevailing trend. So, those will have clearly an influence and a correlation to other related markets including the grain complex. You mentioned the Goldman Sachs as well as the CRB, both appear to me to be headed lower over the course of time. So, that is one strike regarding the inflationary psychology that has cropped up here in just the last couple of weeks.

Pearson: So, this is not a dead cat bounce, we're going to see this struggle going forward. And another thing I want you to comment on, the strength of the dollar over the last couple of weeks has been pretty surprising, backed of a ltitle bit this week. Are we going back to strong commodities and a weak dollar? Is this part of that general pullback?

Robinson: It appears to me the dollar is making a serious attempt at a bottom. Other pundents more qualified than I would argue the dollar has in fact bottomed for a host of reasons. My assessment of things is pretty much a technical or a bar charters view of things and it appears to me if we were to close tonight, call it a month, the end of the month, we would leave several months of previous closes below us and that is highly indicative of a market that has, in fact, bottomed. So, to answer your question, that dynamic, I think, is in position to change. The value of the Brazilian real, just to mention one of many currencies, appears to me to have topped. So, the relationship does appear to be changing. The dynamic of a weak dollar turning now towards a stronger dollar is in position and in a go position.

Pearson: We've had phenomenal exports, grains and meats both, thanks to that weak dollar. Now that we see taht strength how much is that going to have an impact on us?

Robinson: Well, I think the demand element has been accentuated by the weaker dollar. I'm not sure we're going to eliminate global demand by any stretch of the imagination but it will likely become more expensive for importers than it has been the last couple of years. The lag time between the actual witnessing of the strength of the dollar and the perception in the futures markets, two different entities. Futures markets pick it up much, much quicker.

Pearson: Let's talk about specifics. Let's talk about the wheat market and what happened there this week, strong week for wheat. We seem to have excellent production going in the United States this year. Worldwide it seems pretty good but you talked about global demand just seems to be ensatiable.

Robinson: It seems to fly in the face of conventional wisdom. Global wheat production is this year forecast at 681 or 682 million metric tons, a 60 million metric ton increase year over year, ending stocks are projected 136 million metric tons. So, given that it would seem the supply argument is kind of a mute point, plenty of supply, adequate supply and with that in mind I think it's probably appropriate for our producer audiences to become a bit more defensive than has been the case up until recently. Soft red wheat futures I think old crop defined by September and December approaches $9.50, I'm a willing seller. New crop I'm a bit more undecided and therefore minimum price would fit I think our risk management position a little more appropriately. Hard red winter wheat kind of the same scenario, old crop contracts approach $9.50 I'm a seller, new crop minimum price. Minneapolis wheat futures or the hard red spring contract in that $9.50 to $9.75 area I'm a willing seller, new crop minimum price seems to be appropriate to me.

Pearson: So we're starting to make some sales. What about on corn, Virgil? What is your outlook there?

Robinson: A couple of things -- we had the Pro Farmer Tour results and, again, we've got kind of a cluster of forecasts here. Pro Farmer, Informa, FC Stone, USDA, all pretty much in that 153, to 155 area yield wise, all in a balance sheet scenario which suggests a carry out one year from tonight of about a million bushel. To me that is an adequate supply. Globally there yet remains some uncertainty as weather remains a wild card but I think it's appropriate to note tonight the conversion now of old crop ending, new crop beginning. I think there will some basis fireworks in local markets and as a result of that for the market timers in our group I'm a willing seller of old crop corn. To ensure against weather phenomenon, an early frost or something of that nature I would buy then simultaneously the $6.30 December call or the $6.30, $7.30 bull call or vertical call spread at a debit of about 25 cents. New crop crop budgets both here in the state of Iowa as well as Illinois both representative of the two biggest corn producing states suggesting next year's corn will cost about $4 a bushel to produce. New crop futures are around $6.50. I like the idea of a hedge to arrive on a portion of that production if the basis is poor. If the basis is strong or relatively strong I would sell a portion of new crop production and capture the economics here.

Pearson: Again, you're somewhat taking some vital steps now as this market progresses. Let's go over to soybeans and what is your scenario there? We're talking about more beans down in South America. What are we going to do here in the U.S.?

Robinson: Increase in sewn hectares is being suggested in both Argentina and Brazil. As we mentioed there is a good argument now that the dollar, Brazilian real relationship, that dynamic is changing and to me those are warning signals. Exports the last coupel of weeks ahve been relatively poor as importers have either cancelled or deferred shipments from this crop year to the next. I like the idea of capturing some value here assuming you have old crop soybeans in quantity I think the market is providing a good opportunity on this recent bounce to make some sales here and I would do so. If you're concerned abuot finishing the crop and Pro Farmers Tour suggested two things, maturity and moisture concerns, then fine, go ahead and replace that with some type of call strategy or vertical call spread. New crop, again, the economics at least in my mind new crop beans will cost somewhere in the vicinity of $9 or $9.50 to produce next year. The new crop soybean futures contract is around $13.50. Assume a basis of 75 cents for a dollar. The economics, at least in my mind, and the concerns that now have surfaced with various other factors that we have mentioned here briefly tonight warrant some percentage of sale, 10%, 20%, I have no argument there.

Pearson: Especially with those kinds of numbers, those kinds of production costs now requiring the kinds of numbers that we used to dream about getting, $4 corn and $10 beans. Walt Hackney, I know you're fascinated by all this grain talk. Let's talk about the livestock side. Let's move over to the cattle business. We've had a nice break on these costs, we're down from $8 in corn, we're down from $16 on the beans, bean meal has pulled back. Do we have any black ink out there in the cattle business?

Hackney: There is -- we're able to hold our costs at about 30% less than at the high this year. That was a real lifesaver for the cattleman and actually the hog producer also. Bean meal as that went and the cost of production, it all went relatively low compared to where we were. So, that was a good thing. But I have never seen a market so totally reliant on exporting as meats as we are right now. We're sitting here with almost total dependency on the appreciation of more and more export of particulary beef. Pork is getting along in export very well compared to beef. Beef is lagging behind. We've had a reluctance in Korea, we've had a reluctance in Japan, there's some attempts to build a market in China. Those things are all necessary for us to hold this beef market together. We absolutely have got to improve on our export industry. Our domestic industry right now is so driven by the U.S. economy and the budgets that the housewife and the houseshopper, if you will, are under to buy for the family it's prohibitive for them to be expected to pick up all of the slack in this production rope, if you will. So, we're really behind on exporting and we've got to increase that export business.

Pearson: Walt, Virgil just talked about the dollar coming up, that doesn't really put some wind at our back, we're going to have to make our own luck I think to make that happen. But if we look at what's going on out there from the producer's standpoint we had a break on the board this week on these calves and corn jumped back up a little bit. Can we buy cattle right now? Should we be buying cattle? Should we be booking calves for this fall right now?

Hackney: Well, we've got a problem in the availability. So many of what we knew of as inventory that went to grass as short yearlings this year and as we speak are weighing nine or eight and a half in that area and coming off of the grass areas now so many of those cattle are not available to the cattle feeder. Most of those, a huge percentage are already under contract to a feedlot user and particularly the corporate feedlot users. So, the availability of those yearlings have kept that market extremely active. Here in Iowa, for an example as recent as yesterday, eight and a half weight yearling steer would bring $1.16 to $1.17 and you get beyond that movement in the calf for immediate delivery as bringing something in the $1.25 to $1.30 range weighing five and a half for immediate delivery, even up to six. Contract cattle for fall delivery we're looking at somewhere around in Montana $1.12 to $1.14. The problem is and the catch is the freight to getting back to the Midwset and putting them on our good corn. We're in a box in regard to where's the corn really going and then again where is the fuel really going and those are the two driving entities taht is going to support or defeat these cattle markets.

Pearson: Let's talk about another factor and that is the hog market. I've haerd from producers that it's the packers making all the money here, they're running $13 a head and so forth. Where do you see the hog market going in the next three months?

Hackney: I think the packer is going to make more money and I think the producer is going to take significantly less money in the cash market. It would appear that we are going to have extraordinary numbers coming at us for the fourth quarter of this year and the first quarter of 2009, way more than what had been earlier predicted in the spring and late winter of this year. It was an assumption on many of our parts that liquidation was going to take place in huge numbers in the sow herd and as a result the pig crop as we would look at market hogs going into 2009 particularly the hog market was going to be supported by a lack of volume and a lack of pork and an extraordinary exhilaration in exports for pork. That isn't the case now. That market responded, the feed costs went down, the producer went from enormous losses to a break even and then started making a little on the hogs. As a result he quit culling. The liquidation didn't take place. So as a result we're going to have an abnormal amount of market hogs coming at us at the latter part of the fourth quarter and then particularly into the first quarter of 2009.

Pearson: Kind of bracket me in some prices, what would you see for the last quarter of this year, first quarter of '09?

Hackney: I think the potential for cash hogs in the latter of the fourth quarter of this year is something in that 42 to 45 cent range. I think the potential is there to see hogs drop below taht $3 to $5 in the first quarter of 2009.

Pearson: Okay, so plan accordingly. We'll keep the exports going and maybe that will change. The last time we talked Canada did have a pretty good sow liquidation did they not?

Hackney: Well, they have maintained. We got most of them down here as you're very aware and it crushed our sow markets significantly. But it was also the anticipation of combining a big liquidation of U.S. sows also. Now, the yearling sows didn't materialize in those numbers so Canada took a big liquidation up there and that was obviously supported by the Canadian government subsidies to those producers for culling those sows out. They may be in better shape production wise right now than we are.

Pearson: Well, we'll see what happens down the road. International factors are amazing in every sector in the business of agricutlure whether it's livestock, whether it's the grains, whether it's energy, you name it. Walter, Virgil, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from both Walt and Virgil on where these markets just may be headed visit the Market Plus page at our Web site where you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. And be sure to join us again next week when we'll learn how one Missouri soybean farmer produced an average of 154 bushels per acre last year. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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