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Market Analysis: Jul 25, 2008: Darin Newsom

posted on July 25, 2008

With nearly perfect weather over the past few weeks, and favorable weather forecast throughout the Midwest, many grain prices trended lower.

For the week, September wheat gained 7 cents but the nearby corn contract was down more than 32 cents.

Despite some fears that 40 percent of the crop might not mature before frost soybeans continued their downward trend. For the week, August soybeans lost more than $1.45 while the nearby meal contract dropped almost $21 per ton.

In the softs, cotton stopped its downward trend with the December contract posting a gain of $1.26.

In livestock, the August cattle contract was up 32 cents. Nearby feeders lost another $2.12 cents and the July lean hog contract was up $1.70.

In other markets of interest, the Euro lost 143 basis points against the dollar. Crude oil traded sharply lower for the second week in a row losing more than $5.60 per barrel. Comex Gold lost nearly $31.20 per ounce. And the Goldman Sachs Commodity Index lost more than 38 and-a-half points to close at 795.50.

Market Analysis: Jul 25, 2008: Darin Newsom Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Darin Newsom. Darin, welcome back.

Newsom: Good to be back, Mark.

Pearson: There's been a lot of talk about this energy crude oil being a bubble. Is the surface tension starting to give way? Is the bubble popping? Is that what we're seeing with this $20 pullback?

Newsom: It's interesting. Is it a bubble or are we just seeing a normal market reaction here? The last bit of the rally that we saw, we saw the market move from the low $120s the first time up to that high that you mentioned of $147. It did so really without the benefit of a lot of support from supply and demand. So, now we're getting the back side of that and the market is coming back down now trying to find that area, that price level where the commercial buying comes back in. It's also, though, testings for a key technical point here that gets down below that $121. We could see some more selling come into this market. So, has the bubble burst or is the market just simply slipping back towards reality and waiting for the fundamentals to come back into play? I think it's more of the latter. But, again, you talked about the CRB, the gold and everything else, we're seeing a lot of commodities coming under pressure all at the same time. So, for whatever reasons commodities as a whole seem to have lost some of their luster over the last few weeks.

Pearson: So, the momentum seems to be fading. Let's talk about the wheat market. Some of the luster has faded there because of the fact that we've had some decent production.

Newsom: We have and the soft red winter is really an issue. This is the market that always seems to struggle against the rest particularly if we look at the cash and the futures markets combined. And it's this cash market that really has everyone's attention because the national average basis continues to run more than $2 under the nearby futures. The whole argument of lack of convergence and the market being broken, everyone is pointing their finger basically at the Chicago wheat market and there's even going to be yet another meeting next week from the CFTC addressing this issue itself. So, this market has had a lot of trouble, it's been coming down, a lot of the pressure continues to come from a very bearish supply and demand situation, a cash market that just refuses to move and it's keeping it in the doldrums down here and during a time of year when it normally tends to rally. But we just haven't seen any interest regardless of what's going on in the other markets of buying, particularly on the cash side, coming into this market.

Pearson: As we look at the whole financial situation obviously with the struggle the banks have been through and as we talked about at the beginning of the show with foreclosure issues and everything else and that whole unsettling is that pulling apart and some of these funds have been in buying commodities in a big way?

Newsom: It is because it drove a lot of money to the commodity markets. And the back side of that was as the money was coming into the commodity markets we were seeing some pressure coming into the Dow Jones, getting into the credit and foreclosure and all these sorts of issues that it had to deal with. Now as we're seeing that the Dow dropped below 11,000 a couple of weeks ago and seemed to find some support around 10,700, 10,800 somewhere in that range the question is now is it starting to pull money back in on the idea that the Dow and the equities as a whole are undervalued and it's going to start pulling away from commodities which might be what we're seeing in so many of these investment commodities.

Pearson: Money never rests. Let's talk about this and go back to this wheat market. You mentioned the issues they're having there. Production wise we're in great shape. Everything that I've heard has been very positive on the U.S. wheat production side. So, when I say we have good production I want to throw in the word finally because we had a couple of struggling years where these folks have really been hit.

Newsom: We really did and it's nice to see that the yields look like they were going to be coming in once we get the final numbers in. Now, the question is automatically rolling forward there has to be another question and that is the spring wheat condition. The further west you go in the spring wheat area the dryer it gets and so there is starting to be some concern. Week to week the crop condition reports really seem to jump quite a bit. So, yes, they feel much better not only with the U.S. but some of the other parts of the world that raise a lot of wheat. Now they're starting to focus on the spring wheat as well.

Pearson: Where are you on making wheat sales?

Newsom: We've basically cleaned up everything that we needed to right at harvest. So, that can be anywhere from 40%, 50%, 60%. I wouldn't get too much more than that at this point because, again, the market is down near a low. Yes, it could continue to break back if there's pressure from the other commodities. But we're going to give it a rest here and see what can happen at this point.

Pearson: Let's talk about the corn market and what's happening there. There's been a lot of pressure this week. A better feeling about the condition of the crop and you've been throughout the grain belt as I have. In the last week or two I've been from Maryland and seen everything through Chicago and Illinois across Iowa, Indiana and crops have improved quite a bit. But they're very behind, very late.

Newsom: Yes, they are and you bring up a key point because a lot of what has happened in this corn market has come from the speculative side and I hate to always use that as a backdrop. But what we've seen is we've seen this group, this classification of trader reduce their net long position by over 100,000 contracts in the last two to three weeks alone putting immense amount of pressure. We've dropped the December corn futures more than $2.50. The idea is at what point do we get oversold? At what point do we say, okay, as you just pointed out the crop is actually worse, it's running behind schedule, what happens if we have an early freeze? What happens with all of these possible scenarios still to play out? Is this going to start bringing support back into the market? It certainly should. Markets overreact both ways. We ran up to almost $8 on the flooding throughout much of the Midwest. Some would say that was possibly overdone. Coming back to $5.30, $5.40 wherever we came back to I think it was Wednesday also views a little bit overdone. So, I think there are a lot of issues and as we get further into the summer we're going to see these start to come into play and they can very possibly bring some support back to the market.

Pearson: You've been a pretty aggressive seller for the '08 crop. What about '09, '10, '11? We're looking at thousand dollar a ton nitrogen, we've got some input costs that are going to be locked in here for the next twelve months.

Newsom: I haven't been real heavy on selling too far forward because we're in a long-term demand market and just because we're seeing these wide swings all it does is it means the old rule is playing out, large rallies make for large retracements and that's really all we're seeing at play right now. It doesn't change the fact that we're in a long-term demand market. So, I'm sitting back on most of the '09, '10 and further out waiting to see what develops, waiting to see if we start to move these markets higher again.

Pearson: Huge sale on soybeans this week and we've seen that continuation, same kind of thing as what we've seen in corn. What are your thoughts on soybeans right now? There's a lot of panic thinking out there in the countryside.

Newsom: It's a very similar scenario. The worst case has been built into the price when it rallied so far and the one thing that's different between the two markets is that we haven't seen this huge wave of long liquidation coming into beans. It's still vulnerable to that. We look at the November contract you could still come down to about the $13 level before we start to generate some buying. So, there could still be some pressure in this market. But, again, just as in corn it's been behind from the get-go, from planting on through the growing season. There are still going to be some issues. If the summer does turn hot it's going to be an issue. If we do start to see more talk about an early freeze it's certainly going to be an issue. So, I do think soybeans still have some potential. Again, it's just doing a normal retracement as traders reposition their money.

Pearson: Not a time to panic and sell?

Newsom: I don't think so. If you don't have the sales on the books right now I don't think I would put them on. I would wait to see what starts to develop as we get a little closer to harvest.

Pearson: Same question, '09, '10?

Newsom: Staying away from those, we're looking at '08-'09 ending stocks coming down to about -- the last report was about 175 million -- less than that -- about 140, 150 million bushels. It could easily come down to where the 2007-2008 are around 125. And so continue to hold off on those sales. Let's see what the market does once we see what we have in the fields.

Pearson: Real quick comment on cotton, a little up week this week contrary to everything else.

Newsom: Had some support come in from the weather, some hot, dry conditions in west Texas plus the concern over Hurricane Dolly. Late in the week we were able to see the December contract begin to rally.

Pearson: Let's talk about fed cattle for just a minute. Obviously the flip side of all these high prices have been price being endured by the livestock sector, not a lot of support coming from the judge out in Washington for opening up CRP. So, people are back looking at utilizing more of our conventional crops, corn and soybean meal. What is your take on this fed cattle market? The cash market took kind of a hit this week.

Newsom: We've seen the cash market under pressure now. I think we topped out a little over $100 a few weeks ago. We've seen the cash market under pressure since then, not that surprising. I think we could see maybe another week of this sort of pressure. We had the cattle on feed report out today, again, very neutral in its numbers. But I'm not convinced that we've seen the top in the cash market. I think we're still going to get into a situation a little bit later this summer possibly into the fall where the numbers are still going to be tight and we're going to see this cash market come back up. I'm not ready to say the cash market is over. I think it has got some more life left in it.

Pearson: Let's talk about the hog market and what you see happening as far as that business is concerned. I'm hearing things about big liquidation, huge record sow liquidation occurring perhaps this fall, perhaps it's under way now. What are your thoughts on hogs?

Newsom: It's interesting. We've been hearing about the liquidation for a couple of years and any set of numbers that comes out just really doesn't back it up. What we're really being supported in right now is a continued strong export demand, we're seeing better cash markets, we're seeing strong kills throughout the course of the week and this is helping to push this market higher, it's helping to support this market. But from a liquidation point of view the numbers just aren't there, not yet. Now, maybe it is just a slow ongoing process that will come to a head at some point, something similar to what we've seen with the cattle not going into the feed yard. And then we will see the market react much stronger than it has here over the last couple of weeks. Still taking a bit of a wait and see approach on that. There's a difference in the overall industries and how they're run and that's helping to affect the hog market as well.

Pearson: Alright, we'll be anxious to see how it all works out. Darin Newsom, thank you so much for your insights. We appreciate it. That's going to wrap up this edition of Market to Market. But if you'd like more information from Darin on just where these markets might be headed visit our 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 absolutely free at our Web site. And, of course, you can join us again next week when we'll meet a group of farmers who jump on their tractors to cut a rug. We'll do-see-do with the Farmall Promenade next week on Market to Market. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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