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Market Analysis: Mar 21, 2008: Darin Newsom, market analyst

posted on March 21, 2008

A holiday-shortened week of volatile markets saw wheat, corn and soybean futures contracts going limit-down or near limit-down all four days. The downward trend has some traders and investors wondering if the bubble has burst.

For the week, May wheat fell just over 2 dollars, while the nearby corn contract lost a little more than 50 cents.

Soybeans spent most of the week limit down. One reason for the declining price was the potentially larger South American soybean crop. For the week, May soybeans plunged a $1.45, while the nearby meal contract lost $26 per ton.

In the softs, cotton continued its downward trend this week with the December contract losing almost $8.

In livestock, the April cattle contract gained two cents. Nearby feeders were down 18 cents. And the April lean hog contract gained $1.30

In other markets of interest, the Euro lost 304 basis points against the dollar. Crude oil dropped below $100 per barrel briefly but closed at almost $102 per barrel on Thursday. Comex gold lost another $79 after being in record territory last week. And the Goldman Sachs Commodity Index lost 51 points to close at 660.50.

Market Analysis: Mar 21, 2008: Darin Newsom, market analyst Pearson: Here now to lend us his insight one of our regular market analysts, Darin Newsom. Darin, good to have you back. What a week it's been. Great week to have you on the show after the week we've had in Chicago. Let's talk first about the wheat market and there's been this feeling that wheat consumption has been outpacing wheat production and then we run into a year like last year where we don't grow a wheat crop anywhere. Is this the beginning of the long tail, short crop or not?

Newsom: It could be but I will say in the wheat market right now, we've seen the market come down here recently and the whole idea is as the supply market comes to an end, as we get closer to the next harvest. But the traders in Chicago, Kansas City, Minneapolis are very concerned with the zero margin of error in the wheat this year. You mentioned the fact, you know, demand continues to grow and we still see decent, not outstanding export demand week to week but demand continues to grow. And if we don't start to build supply from the U.S., Australia, Canada, Black Sea region in Europe, all of these areas, if we don't start to build some supplies this year then we can return to the same sort of price situation that we saw in 2007, early 2008. So, yes, we're in a bit of a lull right now, we're just coming out of dormancy in the winter wheat market, we're still debating on what the Australian situation is and so many other regions. And since there is no fresh bullish news it has allowed the market to come down in line with so many others that are being mentioned here on the program. But I don't think that they're really ready to say that we're out of this supply problem in the wheat market yet. We're going to have to see how the spring weather is and the winter crop and then go from there.

Pearson: We've got to lose this wheat crop typically a couple more times before it's in the bin. Spring wheat similar action up in Minneapolis?

Newsom: There is and spring wheat was really one of the catalysts this year as it roared to $24, $25 earlier this winter. It's coming down to an acreage debate as well. Are we going to continue to lose spring wheat acres? The high protein, high quality wheat that we had from last year that was the driving force, that's what made it such a valuable commodity. Well, again, as we head into the next harvest is it going to be as valuable? Add onto that if we all of a sudden don't have the acres or if we get more acres how is this all going to play out? And it's like so many other markets, it's been incredibly volatile and I don't look for that to change any time soon.

Pearson: Alright, so you would hold off on making sales after this move down?

Newsom: Yeah, I would not want to be selling down in here. I could be regretting that in the next couple of weeks if we continue with these limit down patterns and in this wheat who knows what the limits might be. I just really don't want to sell into this kind of hole. Let's see what starts to develop, see how these other outside markets begin to react and if we don't get some better opportunities.

Pearson: Strengthening dollar, bigger South American crop are issues too that I want to talk about. But let's talk about the corn market, not quite as difficult a week as has happened in soybeans and wheat but not a great week either. What is your take now on the corn market? It seems like we've got until this planting report to really determine, the prospective plantings report just what could happen to this crop this year.

Newsom: And that's going to be the beginning of this planting season and as you mentioned in the earlier pieces we're just at the very brink of this, we're just moving into the planting season and there is all kinds of debate in front of this report next week. Right now the most common number that we're hearing is in this 84 to 88 million acre range as compared to 93.6 last year. So, it's quite a reduction. USDA's outlook, 2008 outlook had it pegged around 90 million acres. So, we're seeing it back off. Now, we add to that the fact that these winter weather systems, rain, snow and so on continue to move through the eastern Midwest and so on causing floods in the Ohio and Indiana areas. The idea is on the floor already being circulated that we could see planting postponed a bit, pushed back a bit if this wet weather continues. We've had above normal moisture throughout the winter. If this starts to play on acres as well and all of a sudden that 87 million acres we aren't able to get that in the ground then where do we go with these markets. So, again, just like in wheat the corn traders are a bit nervous, we don't have the bearish technicals that we have in the soy complex so there is still this bit of support out in the corn market but they're just not ready to call it over at this time.

Pearson: So, to sell or not to sell?

Newsom: I wouldn't sell in here. We've been making some sales all the way up, not as heavy as in some other markets, but I certainly wouldn't sell after this past week. Let's see what develops particularly in the corn. There's just too much nervousness in the corn market, still too much doubt about where we might go. I still think there's strong possibility of getting the Dec. corn up over $6 if we have any sort of weather market at all.

Pearson: Let's talk about soybeans now. Obviously that was the one that was literally hit the hardest this week. And literally just unrelenting pressure on the down side. And as we mentioned, of course, meal under pressure as well. Obviously the chart gives you kind of an idea what the trend was. So, there's a lot of people and I talked to a lot of producers over the last two or three days there it was, we missed it. What should we do?

Newsom: Well, they very well may be right. We talked all winter about the fact that at some point these markets are going to turn and we're going to start seeing money come out of these markets, the commodities as a whole and the numbers that you shared from crude oil to gold to soybeans may well be indicating that this money is starting to pull out of these markets in a hurry. Two weeks ago, March 7th, soybeans established a bearish technical signal that tends to indicate a long-term top is in the market. Now, it coincides with the fact that South America is indeed harvesting a large crop with projections anywhere from 59 million metric tons to 61 million metric tons. Argentina is having a large crop. So, this has weighed on the market. The dollar is starting to turn around and it's certainly going to weigh on the dollar. The idea that if we were really going to be able to extend the rally in soybeans it was going to have to be before the South American crop came on the market, again, going back to the point we made earlier, soybeans were rallying in a supply driven market, we had U.S. stocks. But supply markets only last until the next harvest and that was the South American harvest. We've seen some heavy liquidation. We've got the sell signal in soybeans. This market could easily come off another dollar, dollar and a half. What we're looking at in support in the November contract now is about ten and a half. So, we've still got a lot of room to come down, a lot of money could still come out of these markets. Soybean and the soybean complex as a whole is probably the market I'm most concerned about at this point.

Pearson: We're looking at these higher input costs and you talk to a lot of farmers, you know what we're dealing with right now. Looking forward to this fall, '09 and, again, there aren't too many cash forward contracts out there with the way the commercials are looking at this thing. So, everybody is going to have to be kind of in charge of their own risk protection. What do we want to do? Do we want to target some prices or just wait for this weather market to set in or what?

Newsom: Well, I don't know if the weather market is going to help beans all that much. We're talking about the possibility of 71 million acres in beans, just an incredible jump from last year. And unless that number is vastly different at the beginning of this season that the prospective plantings report will show us or at least indicate to us then this market really doesn't even have that leg to stand on. As far as making sales it's been very difficult to get into the futures market because of the weakness in basis. Now, one of the things that I have been a proponent of here recently is looking at DTN index futures which are traded from the Minneapolis grain exchange which are a cash back, a cash market back futures. That takes the basis risk out because that's one of the biggest things in the soybean market right now is still this basis risk that we've seen throughout 2007. Volatility isn't going anywhere any time soon so that keeps the margin risk in the equation as well. Hedging has been very difficult, buying puts has been very difficult. We've been able to make some cash sales but that's gone as well as commercials have backed out of the market. There's really not a lot of opportunity right now to get much forward contracting on after this price break of about $1.50 over the last week. Hard to do it right now, better to do it if we can get a rally in this market, again, look at those index futures, see if that's something that you can use because it locks in the basis and the futures, try to get some selling on the next rally.

Pearson: Let's talk about cotton real quick. Again, cotton under some pressure this week as well. We've robbed some cotton acres for soybean production primarily and I think that was a big help. But now as you look forward you see that market backing out substantially.

Newsom: Yeah, now what was interesting to me in the cotton is that it came under the same sort of pressure that we've seen all these other markets, you know, money just pouring out. And since a lot of this is chart based and technical based it was interesting to see the cotton come back and find support in the front month contract, right around that 58.8 level, important that it's the 50% level and it didn't break through it indicating further problems could come. If we can continue to hold that we might be able to find some new buying. My concern in the cotton is if we look at the spreads, we look at the major spreads and on out we've got very strong carry in this market. The underlying fundamentals remain bearish regardless of acreage. This could continue to weigh. This could be what pulls us below these support levels and bring more pressure in the cotton market.

Pearson: Let's go over and talk about livestock and some cattlemen and some pork producers had something finally to celebrate. They could finally lock in some lower feed costs after this week and they needed some relief. What do you think is ahead for fed cattle?

Newsom: It almost looks like if we have the feed costs coming down and so on we could start to see these markets rally. They gave us a bit of an indication of that here at the end of last week. We saw some life finally in these livestock contracts, feeder cattle, live cattle, lean hogs were all able to rally a bit tied to the strength in the Dow, you mentioned it was up 400 points. That usually tends to help the livestock contracts. So, we saw a bit of life coming in there and we have to remember that it was the livestock contracts that never really were supported by this huge amount of investment money coming in. So, now that they're moving out of the grains there is some attraction of these livestock now that they're being undervalued. So, it's bringing some money in now possibly. So, it'll be interesting to see if we can start to develop our seasonal upswings, give us the opportunity to get some better pricing on here in April and May start to lock in some of these profits particularly if we can start also locking in on the grain side if these grain contracts keep coming down as well.

Pearson: Despite the fact corn was down dramatically the feeder calf market on the board really didn't do much.

Newsom: No, it really didn't and I think it needs some time to filter through. Everything happens so fast and it was a holiday shortened week. I think we're going to have to see this play out a bit. That was the one market that really didn't' seem to want to go anywhere. If we see another week of this, if we see another week of pressure in the corn and the soybean meal, another $25, $26 come off in soybean meal, just outstanding numbers, I think you're going to start to see the feeder cattle contract react. I think you're going to see the live cattle contract react more than it did this week as well which was basically Thursday and Friday's action. So, again, very interesting looking forward and I do think we're going to start to see some support in these contracts.

Pearson: Talk a bit about the hog market, what you see happening there and particularly from an international standpoint. What's going on with Canada?

Newsom: It's been a little bit rough in the hog market. In the U.S. it's been such huge kill, huge slaughter just weighing on this market but overall I think that we're about to see, you know, we hear these rumors that exports are going to start picking up but will it be enough to offset the type of slaughter that we've seen week after week after week. I just simply don't know that we're about ready to get through all that yet. We did see some signs of life, again, late in the week like so many other markets. But we're going to have to give it some time and see where we can go from here.

Pearson: The whole concept of getting some feed needs covered that's certainly something. We've got about 30 seconds left but you definitely would be starting to work on it?

Newsom: Yeah, I'd start pricing some in here because you never know when this corn market, again, the threat is out there in the corn market to turn around quickly, I wouldn't be in such a hurry in the soybean meal. I think there's plenty of room for it to come down yet but start piecing some of that in, doing some incremental purchases.

Pearson: And, again, for the pork producer out there when are we going to see this big rally? When are we going to see this thing really start to turn do you think?

Newsom: If you look at the charts it looks like it could get to 60 to 64, we could pop up there real quick. But the problem is if we look at the carry in the futures price and we see where the April and the May and July contracts are already trading that doesn't mean that we're going to see much except maybe a stable market through the spring.

Pearson: Alright, Darin Newsom, thank you so much. That's going to 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, it's at our Web site. You'll also find streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free at our Web site. And, of course, be sure to join us again next week as competition heats up for acres on the eve of the USDA's prospective plantings report. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat