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Market Analysis: May 30, 2008: Virgil Robinson

posted on May 30, 2008

The grain markets traded in a sideways fashion this week, as crude oil prices drew the attention of speculators and the scrutiny of regulators.

For the week, July wheat gained 9 cents, and the nearby corn contract was virtually unchanged.

USDA's report that just over 50 percent of the nation's soybean crop was planted failed to support prices. For the week, July soybeans lost about a nickel, but the nearby meal contract was up $4.90 per ton.

In the softs, cotton ventured into positive territory with the December contract posting a gain of $3.64.

In livestock, the June cattle contract gained 34 cents. Nearby feeders lost $8.18. And the June lean hog contract was down 10 cents.

In other markets of interest, the Euro lost 227 basis points against the dollar. Crude oil lost $4.41. Comex Gold declined $38.50 per ounce. And the Goldman Sachs Commodity Index lost nearly 24 points to close at 787.10.

Market Analysis: May 30, 2008: Virgil Robinson Pearson: Here now to lend us his insight on these and other trends is one of our senior market analysts, Virgil Robinson. Virg, welcome back.

Robinson: Hi Mark, nice to be with you.

Pearson: Let's talk about the oil business and just commodities in general. Worldwide demand has just been phenomenal, Virgil. It's just going to keep this pace up do you think?

Robinson: Well, interesting, Mark, it's the end of the month as we visit tonight and crude oil futures make their strongest monthly close ever off their highs a few dollars. But to suggest the trend of that market is anything but up would be very misleading on my behalf, Mark. So, while clearly there can be setbacks and corrections I would use those if I were in the business of buying oil to sustain my business or my livelihood with some type of strategy, Mark, defensive strategy. It appears to me given at least the trend of this market it is headed to higher levels. Gasoline futures much the same story. However, kind of an interesting disconnect this week and this month. Ethanol futures do not close the month or the week higher but, in fact, lower, Mark. So, I'm a bit miffed by that behavior but clearly that is a signal I think to those in the industry that any kind of recovery from tonight's settlement at around 2.39 or thereabouts is probably a pretty good hedging opportunity. The 2.60 mark appears to be very formidable price resistance for ethanol futures.

Pearson: Well, so the energy demand remains strong. Obviously last year we couldn't produce a wheat crop anywhere. Wheat prices have been extremely strong and now that harvest is progressing here in the United States, Virgil. What's ahead for wheat?

Robinson: Well, I think maybe we should mention the recent WASDE report, Mark, is projecting global wheat production at a record 656 million metric tons which should that come to fruition would be somewhere in the vicinity of 30 to 35 million metric tons larger than the previous year. And that clearly has been the factor which has driven wheat prices lower over the course of the last couple of months since you and I last visited. I think, Mark, however, wheat futures have a tendency or at least historically have a tendency to bottom sometime in the late May or through the month of June. I think this year's market will be in that direction. Both Kansas City and Chicago wheat futures appear to me to have awfully good support based on some technical observations in and around $7.40. I don't care to be short wheat futures and/or cash based on a $7.40 futures market. However, I would, on the other hand, be a willing seller as either of those two futures contracts or exchanges approach $9.00. So, I think we've got kind of a zone carved out here, Mark, for the next sixty to ninety days, $7.40 to $9.00.

Pearson: Alright, let's talk about what's ahead in corn prices. Again, it looks like we got the crop in for the most part, still some concern about soybeans but the corn for the most part is taken care of, and acreage would appear to be adequate. USDA's decision on CRP I'm going to talk to you about that in a little bit. But just as we look at things tonight, as you look ahead in this corn market what do you see, Virgil?

Robinson: Mark, I'm still a little concerned in select areas regarding the planting of corn. We still have some corn to plant in select areas. We'll have, I think, because of the recent deluge precipitation wise, some replant issues weather permitting, Mark, and, of course, emergence at least based on this last USDA report of a week ago lagging last year's pace and the five year pace pretty significantly. So, we still have some issues there regarding acreage and the amount of acreage, Mark. I'm concerned about that, so is the market. Late today the market responded by rallying very, very significantly based on a poor weather forecast this up and coming week. So, to answer your question, again, world ag supply and demand report projected global coarse grain production to be about 1.1 billion tons this year, Mark. Should the U.S. crop fall short of trend, and there is reason to, I think, be dubious of that fact, we're talking about even smaller production and smaller ending stocks. No margin for a crop shortfall. Mark, I wouldn't at this point -- if you've not priced any new crop corn a minimum price, a put option is an appropriate strategy as an insurance vehicle. I think old crop grain, Mark, given the fact that demand at least as measured by the amount of carry that is developed both in the futures and in the cash markets is suggesting you go ahead and sell that. But I would replace that with most likely a vertical or a bull call spread. So, I still see price prospects, solid price prospects in corn because of production uncertainty stretching forward here through the 2008 crop cycle in North America.

Pearson: With that cycle continuing do you want to make any 2009 sales?

Robinson: No, I don't at this point in time, Mark. I'm uncertain of production costs, all the variables that are associated with it. At a minimum I would consider a minimum price contract.

Pearson: Let's talk about soybeans and what's happening there. Again, just a hair over 50% of the beans are planted as we enter the first weekend in June.

Robinson: Behind last year, behind the five year phase emergence is also an issue there, Mark. And, again, weather will certainly be a driving force, could trump all of what we're going to discuss in the next couple of minutes. So, please be advised of that. Again, projecting an oil seed, global oil seed crop of about 425 million metric tons should that come to fruition, Mark, that would be about 25 to 30 million metric tons larger than last year's production and would certainly relieve the concern about supply. But, again, we have a cropping cycle ahead of us here and the uncertainty of weather and all that is associated with that. Old crop soybeans, again, there's been a carry built into the futures market or let's say the inverses have dissipated and dissipated rapidly. And that traditionally suggests that demand is waning. So, old crop beans that I'm concerned about, Mark, to the extent that if I still were lugging the majority of last year's crop I'd sell it and I'd replace it, again, with a vertical call or a bull call spread or some type of option strategy. New crop minimum price, I wouldn't object to that at all. Finalizing the price on new crop beans at this point with the cropping cycle much of it yet ahead of us I'm reluctant to do that.

Pearson: Virgil, what about on the flip side of this whole thing, this record demand, the cheap dollar. Should the dollar rally, should for whatever reason crude oil slow its pace are we going to see a pullback on all these ag commodities, particularly beans?

Robinson: Well, depending on some of those variable factors, Mark, yeah that could certainly happen. But in that context I do not see at least in the models and in the methods that I follow any kind of a visible bottom in the dollar index. I still think the primary trend of the U.S. dollar is down. Having said that, today the Brazilian real makes a multi-year high. Mark, the exchange rate is still very advantageous as we talk about those two hemispheres and their ability to market and export soy and soy products. The Argentine farmer situation is unresolved. I'm not sure what to say there. That seems to vacillate from day to day. But clearly the value of the Brazilian real is a factor and I believe it is shifting the business that perhaps would have originated in Argentina, not to Brazil, but to the U.S. And that, of course, puts the illness on production here in the United States.

Pearson: It really does. Let's talk about livestock and, of course, the flip side of these high prices. A little bit of a break now with the CRP opening up from the USDA although I've harvested CRP hay after the nesting season and frankly not a whole lot there of value. But it does, I think, give us some forages or something to look at. Talk about what you see ahead for fed cattle. What do you see in this market? It's been good lately.

Robinson: Mark, futures market as we visit tonight all making contract highs from August out through 2009. Trend of the futures market obviously is up. Beef production a couple of percent or actually approaching three percent larger than one year ago at this time. Beef disappearance Jan. through April as reported by the University of Missouri was actually down, Mark. So, there's some real conflicting information at least in my mind as it pertains to the live cattle futures market. I'm still kind of of the opinion based on the models that I have privilege to see and work with that production and disappearance, live cattle, cash cattle should average something the balance of '08 into the first quarter of '09 in the low to mid 90s. I would try and protect that level particularly if it were profitable to producers either using futures in the form of a short sale at or near these levels or some type of put option strategy less the basis that would equate to the mid to lower 90s.

Pearson: This would appear that the market is anticipating then that we're going through some kind of a sell off or a liquidation at this point and there's going to be fewer calves available, hence higher beef prices going forward?

Robinson: I think that's a logical assumption, Mark. And demand remains, at least as measured by export disappearance in cattle and in beef, the South Korean market opening and becoming, again, a viable market for us, Mark, underscores the fact that we are, I think, exporting some product both beef and pork.

Pearson: Let's talk about the calf market and obviously if we're slowing down our cow numbers and increasing our heifer slaughter our calf numbers would be down overall. You talked about that. Again, very strong numbers ahead for this calf market.

Robinson: Mark, again, the feature, you mentioned the CRP features, probably a psychological factor to some extent but as we just mentioned those deferred live cattle futures contract blowing into contract highs. Clearly that is a bullish factor when you look at feeder cattle futures and feeder cattle supplies. So, here again I'm a little bit disconnected myself here trying to make sense of the last 30 days in the futures markets and perhaps I'm missing something very obvious. I don't know what that might be. But feeder cattle futures appear to me new contract highs, what's the trend. Down? No, the trend is up. So, at this point I would create some type of defensive strategy by using options and create some price floors beneath these feeder cattle futures, Mark, and then let the market play on through the course of 2008.

Pearson: Let's talk about hogs. They were awful on the board this week. Again, some of the deferred contracts, some of the producers I've talked to were actually able to make a little money even with these high price inputs. What do you see ahead in hogs, Virg?

Robinson: Again, futures contracts put in a tremendous week, the last five or six weeks, Mark, we've put ten or twelve dollars a hundred on the lean hog futures contracts. I think export disappearance and demand has been discussed in previous programs. It remains strong. Domestic disappearance at least measured Jan. through April here domestically in the U.S. was up about three and a half percent. So, very good and very strong demand for pork. No shortage of product, however, as pork supplies are bountiful. Again, at this point I think through the course of '08 into the first quarter of '09 based on the models I'm privileged to see and work with cash hogs should average something near the $44 to $47 level through the balance of this year.

Pearson: We'll leave it right there. Virgil Robinson, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from 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. You can also 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 meet a Missouri soybean producer whose 154-bushels-per-acre yield literally amounts to a hill of beans. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

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