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Market Analysis: May 23, 2008: Darin Newsom

posted on May 23, 2008


The grain markets took a back seat to the gusher in oil prices this week. Despite the lack of significant change in fundamentals, corn and wheat prices moved lower.

For the week, July wheat lost 23 cents, and the nearby corn contract declined more than 8 cents.

The soybean trade continues to balance concerns over Southern Hemisphere crops with the pace of domestic spring planting. For the week, July soybeans lost 10 cents, while the nearby meal contract was down $13.40 per ton.

In the softs, cotton trended lower with the December contract posting a loss of $2.64.

In livestock, the June cattle contract was up $2.31 cents. Nearby feeders lost $1.40. And the June lean hog contract was up $1.50.

In other markets of interest, the Euro gained 215 basis points against the dollar. Crude oil gained more than 6.00. Comex Gold gained $35.90 per ounce. And the Goldman Sachs Commodity Index gained 29 points to close at 811-even.

Market Analysis: May 23, 2008: Darin Newsom Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, welcome back.

Newsom: Good to see you again, Mark.

Pearson: Well, the first thing I've got to talk to you about before we get into our grains and livestock is this oil market. An extraordinary week in oil trading. What are the fundamentals driving this whole thing?

Newsom: Well, right now the fundamental behind this thing is the strong demand for diesel, particularly in Asia, particularly in China. And the thought process is, in the energy markets right now and this is coming from a lot of different analysts and some traders themselves, China right now is building up their stockpiles as they're heading into the summer Olympics. They're making sure that they've got enough diesel not only for their vehicles but they also use diesel as a back up energy for the plants, their power plants and so on. So, there's really no reason to believe that we're going to see this market break any time until the Olympics are over and done with. Now, earlier in the program we talked about how there were some spread indications that the crude oil probably isn't fundamentally, the fundamentals probably don't support this market. I would agree with that. Right now we're riding the coattails of the heating oil market through diesel and gasoline is following the crude oil behind. That's why we're able to see the $135 this week in the crude oil, it lost a little bit of steam, came back to $130, found the buying again on Friday and stabilized, if we want to call it stabilized between $130 and $133. Could be just more of the same next week, again, no reason to believe this market is going to break any time soon.

Pearson: Again, these are fundamental drivers behind this huge rally in oil.

Newsom: There is fundamentals behind this market, not particularly the crude oil fundamentals. We're not running out of crude oil, the supply is not that short. Demand is not great but it is still strong for the creation of making heating oil that can be turned into diesel. So, this is where the demand is coming from and this is one of the reasons why we saw the draw down that we talked about, you talked about earlier in the crude oil stocks and the gasoline stocks because more of the crude oil is going to making of diesel fuel which is now being exported overseas.

Pearson: Well, obviously that's been a key driver behind all the issues we talked about on tonight's show regarding increases in food prices but more importantly, farm input costs are up dramatically as well. If you talk to producers that's almost the first thing they tell you about is what they're paying for diesel, what they're paying for the gasoline that they need. So, with that in mind we had a little bit softer week in the grains overall. Let's talk about the wheat market first. What is your take on this 2008 crop so far?

Newsom: No real surprise that we've seen the market under pressure. We were getting earlier reports from the very southernmost part of the southern plains, the winter wheat harvest has started so this is what we normally see, the market tends to trade lower going into June. Haven't heard any solid reports beyond that, it's just going to be probably an average crop. A lot of news out there, news headlines and so on that the rest of the world is waiting to see what the U.S. does to see if we're going to start rebuilding some worldwide stocks and it all starts with the winter wheat harvest in the United States. So, there is a lot of attention being paid to the wheat market this year, probably more so than what we normally see. But, again, early reports are very sketchy. We'll have to see how this thing develops. But from most opinions this thing is going to be about an average crop.

Pearson: As you look forward in terms of what producers can expect, as you talked about, we're into that harvest, we're into really almost in a typical wheat market now.

Newsom: We are, you're exactly right, we are in a typical wheat market. We're going to see the July contract continue to come under pressure. Right now it looks like the July Kansas City could approach the $7.40 level. That's still quite a ways below where we are right now, 20, 30 cents below where we are right now. If we really start to see a crop bigger than what is anticipated certainly we could drop a little further than that. I'm not really anticipating it because, again, the market tends to put in a low in late June and if the other markets or the grains stay relatively firm it's going to be hard to knock the wheat much further. You're going to start getting reports of wheat going into feed and so on and so forth, demand picking up. Give it some support at this level. But we still should see some harvest pressure coming into the wheat market over the next few weeks.

Pearson: A little bit softer in corn this week. What is your take on corn prices going forward? Again, if you look at what the USDA is telling us in terms of planting we're getting caught up as we knew we would. A lot of the corn maybe not planted ideally but it's at least in the ground. What is your outlook right now in this corn market?

Newsom: Right now if we look at the corn market itself it's gone into a stabilization or just into a consolidation phase. The December popped above $6.50, went up to about $6.55 1/2 and abruptly came right back right down to around $6.05, $6.10, that's the December corn contract, new crop contract. Until we get this next piece of news, this next bullish piece of news to really be able to give this thing the momentum to go up and take out those highs we're probably not going to go anywhere very fast. As you said, the acres are getting in the ground. We're approaching that line in the sand that says, okay, all of a sudden we're going to go from rains being bullish the market because it slows planting to rains being bearish because of the old adage of rains make grain. That's just around the corner. And, as you say, the Memorial Day weekend we move into summer, they're going to be watching the weather forecast closer. Not really looking for much in the corn market right now and all of a sudden they're going to start paying more attention to the long-term weather forecast, is it going to get hot and dry. Most of the lower production has been built into the price up at these levels. It's going to take something, again, to push us much past this and it would not be that surprising to see the seasonal top coming in, in late May, early June and for the market to start working lower without that next round of bullish news.

Pearson: Alright, without more bullish news what about crop sales in '09? What is your take on that?

Newsom: Right now I've got about 10%, maybe 20% out into the '09 season. '08 we're sitting at about 50%. I'm still not all that crazy about being overloaded in '09. I want to see how this market begins to play out. Certainly if we want to get some on the books, I'm not going to tell people not to. But I do want to sit back a bit because even if we see this run up and then see it pull back down, not to say that we aren't going to have this normal seasonal move higher later this fall into the winter that could possibly give us better prices yet.

Pearson: Okay, so, again, we're really back to Mother Nature at this stage of the game. Talk about the bean market and what's happening there. What's going on in South America? Are we getting through some of those labor issues down there and some of those strike issues?

Newsom: That's the interesting thing in the old crop beans. If you watch it, it's down 10, 20, 30 cents on one day, up 10, 20, 30 the next. It's all commercial buying or selling or whatever and it's all based on what this Argentine news is. It seems to change day to day. Overall the old crop market continues to look a little bit bullish. We're still dealing with some tight stocks to finish of '07-'08. But it's after that, it's as we go into the new crop with the expected larger acreage, you know, the situation still looks quite bearish. If we look at the fundamentals of the market the futures contracts aren't able to really push through to new highs. We seem to be seeing selling generated each time we get the markets to rally. So, I think as soon as we do get the Argentine situation settled and we start to look more at the new crop market the soy complex as a whole could probably start to turn lower again as it tends to do this time of year as we get into mid-June and start to head lower again into the summer.

Pearson: Sales strategies at this point for soybean growers?

Newsom: Actually I've been a little bit more aggressive in the soybeans. On the old crop, '07-'08, we've used this rally, basically cleaned out about everything we have particularly with the latest Argentine news to help clean out the old crop. New crop, again, I don't like to be over aggressive but if through a combination of forward contracting and hedging we're up to 60%, 70% covered for next year pretty comfortable with that because, again, no reason to be ultra bullish the new crop beans at least at this point. Yeah, they're a little bit slow in getting in the ground but it's nothing critical yet. So, we're using this rally in the November contract, particularly the secondary rally that we've been seeing over the last few weeks to get some sales on the books.

Pearson: Let's talk about livestock real quick. Fed cattle market, a little strength on the board this week. Turning a corner in this fed cattle market?

Newsom: I think so. Nice trend going in the futures market, cash following behind. It looks like if we look at the spreads going on out into the summer and the fall months certainly indicating that the cash market should be able to continue to go up. So, right now it's looking relatively bullish at this point in the year for the cattle market. It looks like we should be able to hold this thing together pretty well.

Pearson: Feeder market had a nice run last week, a little pressure this week despite a softer corn market.

Newsom: Yeah, and that's always interesting to watch because it's usually a good indicator of what is going on is if we start to see corn moving one way or the other. Feeder market is looking a bit tired, maybe, hopefully we can start to see some spill over support coming from the live market. But as a whole not holding out quite as much hope in the feeder cattle market. It could continue to soften for a bit.

Pearson: Let's talk overall as far as the hog market is concerned and what you see happening in that market. The red ink has just been horrific for a lot of these pork producers. Actually talked to a couple that actually saw some positive cash flow here in the last week.

Newsom: If we try to look at this from just a purely technical or fundamental this market is a mess. And we have to almost take it piece by piece because there's really no good signs in this market right now. But, yes, we have seen the situation improve in places over the last couple of weeks. Now, we keep hearing reports of the cash market is still dealing with lots of numbers out there. But overall I think if we compare where we are now with where we were a few weeks ago this situation has been getting a little bit better and could continue to make that sort of improvement on into the summer. Again, probably not by leaps and bounds. But it certainly looks like the cash market could continue to find some support and possibly push a little bit higher.

Pearson: Have we worked through much of the liquidation that we've seen in the hog market in the last six months?

Newsom: I think we have. And, again, if we look out at the spreads where we've got these huge deferred premiums it's starting to indicate that they're looking at, there's going to be a little bit of a shortage out there and the numbers are going to be quite a bit smaller. So, they're starting to price it in right now. And that is giving us some hope for some prices later on.

Pearson: Only got 15 seconds, Darin. Real quickly, we've had a pull back in corn, pull back in beans, do we cover some feed here?

Newsom: I think we can. I wouldn't be too aggressive because, again, if we're putting in the seasonal tops I think we're going to have better prices later on.

Pearson: Good point. Darin Newsom, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Darin 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 also download audio podcasts of our Market Analysis and Market Plus segments absolutely free of charge at our Web site. And be sure to join us again next week when we'll pay a visit to the National Renewable Energy Lab out in Golden, Colorado. Until then, thanks for watching. I'm Mark Pearson. Have a great Memorial Day.

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