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Market Analysis: Mar 14, 2008: Erin Golly and Virgil Robinson

posted on March 14, 2008


Wheat prices trended higher his week due, in part, to the government reducing projected U.S. wheat ending stocks for this year by 30 million bushels. For the week, March wheat gained more than 65 cents per bushel, while the nearby corn contract moved 12 cents higher. USDA reduced its estimate of U.S. soybean ending stocks and increased its export projection both by 20 million bushels. But the market traded in a sideways fashion. For the week, March soybeans lost a penny, while the nearby meal contract lost $2.50 per ton. In the softs, cotton trended lower again this week with the December contract posting a loss of 34 cents. In livestock, the April cattle contract lost two cents. Nearby feeders were down $1.30. And the April lean hog contract lost $2.83. In other markets of interest, the Euro gained 319 basis points against the dollar. Crude oil set record highs all week and closed above $110 per barrel on Friday. Comex gold exceeded $1000 per ounce before settling slightly lower. And the Goldman Sachs Commodity Index gained nearly 22 points to close at 715.00.

Market Analysis: Mar 14, 2008: Erin Golly and Virgil Robinson

Pearson: Here now to lend us their insights are two of our regular market analysts, Erin Golly and Virgil Robinson. Welcome back you two.

Golly: Thank you.

Robinson: Thanks, Mark.

Pearson: Good to see you Erin, Virgil. Wow, I guess it's time for me to start pulling out those gold fillings with this gold price over $1000, Virgil. But let's talk first about the wheat market. USDA, again, adjusting the numbers a little bit. Looks like wheat consumption continues to outpace supply and prices have been high and pulled back some. What is your outlook now for wheat?

Robinson: I think there's some weather concerns in select areas as well, Mark, kind of underpinning values. Interestingly enough, though, tonight's closes in both Chicago and Kansas City the best weekly closes in most of those futures contracts since the inception of those contracts or the beginning of those contracts. Pretty difficult for me to say the trend of the market is down. It appears to me Kansas City and Chicago wheat futures headed for another test of those all-time highs, $13.50 and $13.00 respectively.

Pearson: And you mentioned the weather problem, there have been some concerns. Again, we're still early in this whole process but with the weather issues that are out there and all the weather problems we had last year, Virgil, it makes for a very tight world situation doesn't it?

Robinson: Yeah, it does and, again, I think in the southwest in select areas of Texas, Oklahoma and southern Kansas, even parts of Colorado wheat breaking dormancy under some stressful conditions and it be immediate the 30 to 60 day forecast that I've seen, Mark, is not particularly conducive to correcting that. So, I think that certainly underpins the market as well as pretty good demand. Although it's slowed of late it's still relatively strong given the flat price level that we're at and the transportation costs associated with moving that globally.

Pearson: And that's another issue. But as you look at this from a producer's standpoint you're not in a hurry to make sales right now?

Robinson: Well, I've made my sales, Mark, and did some replacement with options strategy. If I had a clean slate tonight I would reconcile myself to the fact that the signs of a top will probably be slow to develop but when they do the reaction in the market will be swift and abrupt. So, reconcile yourself to the fact that if you're maintaining this position in hopes of higher prices, which I think are possible, you may ultimately end up selling this product in a market that is headed down and headed down quickly. So, if you can do that and have the discipline to do that no sales are necessary at this point. Minimum price, I wouldn't argue with that on any of the products we talk about.

Pearson: Let's talk about the next one and that's the corn market. Obviously we're hearing -- and Erin is going to address this in a moment -- what's happening over on the livestock side with these continued strong corn prices and we're hearing about pigs coming down from Canada and there's a lot of issues going on in the livestock side. But one of those is this ongoing systemic issue of these high feed inputs. Are we choking off some demand? And is that where we'll see this corn market soften up? The trend still looks like it's higher too, Virgil, what do you see?

Robinson: Yeah, I agree with you on the trend part of the discussion. I am beginning to see some slower weekly export sales, not disastrous by any means, but slower than the pace that we established early on in the crop year. So, I think there is a little rationing in that regard. Erin will probably address the sow slaughter, the guild slaughter, the cow slaughter, the milk cow slaughter and I'm beginning to see some of that, at least in the work that I keep. So, to answer your question, yes I'm seeing some rationing. Do I think the trend of the corn market is still up? To answer that question, yes. Best weekly closes tonight that we've had since the inception of the contracts in Chicago so pretty difficult for me to tell you the trend of the market is down.

Pearson: A lot of producers are out there saying okay, we can go out there and make some money at these prices. It would be nice to go out to '09 and '10. They're not seeing much opportunity out there on those cash forward contracts, Virgil.

Robinson: A lot of vendors have pulled their markets, their bids in those timeslots so it's pushing the responsibility of risk management to the producer's own portfolio or own account. There are clearly opportunities to establish at least futures prices and assume some type of historical basis in those appropriate timeslots. And I don't have any problem with that as long as the folks can calculate within some degree of accuracy, costs of production and that's difficult to do under current variable costs and the fluctuations going on there.

Pearson: The acreage battle is just continuing to roll on here. What are your thoughts? What do you think we'll see for corn acres when this report comes out at the end of the month?

Robinson: I saw private firms this afternoon suggesting something in the vicinity of about 87 million planted acres, down 6.5% year over year and somewhere in the vicinity of 71 to 72. I'm in that camp. However, at least the model that I maintain and have maintained for years suggesting even a few more soybean acres of that, something in the vicinity of 73 and in corn somewhere in the vicinity of around 86. Now, those are not official numbers, those are just calculations based on work that I keep personally.

Pearson: Again, in terms of if you haven't sold anything yet you probably say get some sales on the books but not to be in a big hurry to move this 2008 crop?

Robinson: I like the idea of minimum price in corn now. The behavior of the markets this week were kind of peculiar, kind of a disconnect between corn and soybeans. The recent behavior in soybean futures anyway has been bearish and suggests to me -- and I may be getting ahead here of your question -- but suggest to me some more downside in the soybean futures market. Will that have effect on corn? Probably to some extent but there can be a significant shifting in those spreads. We've seen it many, many times in years past and that is precisely what I think is underway.

Pearson: And, of course, with the soybeans coming off that's going to be when producers make decisions if we're down sub $13 the split between corn and beans is back into the corn's court for most people.

Robinson: Yeah, are we at a point in time where there are a lot of swing acres that could participate in a change here? Sales numbers would probably suggest not so, not a lot of acres but there will be some certainly. We spoke about this a couple of weeks ago where we saw the new crop soybean ratio, new crop corn ration at around 2.6. Post that week, Mark, it's been nothing but straight south. So, again, the market is concerned about that and this guessing game -- we'll have some insight from the USDA on the 31st of March as well as the stocks in all positions report. But, again, it would be my best opinion year over year pretty significant draw down in corn acres, pretty significant increase in bean acres. I think you move your risk management strategies in that direction. Priority beans first, corn second.

Pearson: And what is your outlook for down in South America and what's happening down there? Everything we're hearing is pretty decent.

Robinson: Yeah, it is. USDA did this week, as you mentioned earlier in the show, suggest soylandia, the sum of Brazil, Argentina, Paraguay and Bolivia, biggest crop ever. Now, how it's distributed remains to be seen. They still have the logistic issues but clearly there will be an effort here to satisfy world demand with origins shifting away from the U.S. and I think weekly export sales numbers have begun to underscore that fact towards the southern hemisphere, no question about that.

Pearson: Big South American crop, the trade sure seems to be feeling easier, feeling better about a big soybean crop this year so near-term have we put a high in in this soybean market?

Robinson: Mark, I think some of the technical behavior that I track is leaning in that direction. Strong enough so that if no one -- if clean slate tonight it would warrant, in my opinion, at the very least some type of option strategy. And I know a lot of our listeners don't employ options. But perhaps this is the opportune time to get more educated on that particular risk management strategy. I think it's appropriate, particularly in the bean market given the fact that soybeans, soybean meal and soybean oil all showing signs here that are characteristic and classic in terms of indicating a turn in direction from one direction to the other.

Pearson: And you mentioned the disconnect between corn and beans, a bit of a disconnect between soybeans, soybean oil and the crude oil market which ran up to record territory.

Robinson: Yeah, to some extent that's true, Mark. Again, this is one week or one small period of time. I'm not sure a trend that makes. But clearly your observation is right on the money.

Pearson: Alright, let's talk about the cotton market, Virgil, and what you see happening down there. And they're kind of coming in with the expense of particularly soybean acres when it comes to cotton acres. We've had a big move, we've backed off some. What is your take now in this cotton market?

Robinson: Well, I'm very surprised at the price levels attained in old and new crop cotton. The price behavior after attaining those levels historically stocks to use ratios and simply supply numbers wouldn't warrant and wouldn't sustain these kind of prices. I think there is a euphoria that has gone on in a lot of commodity markets including cotton that maybe has exacerbated price behavior. I would at the very least employ option strategies in new crop and in old, Mark, I'm inclined to sell the cash. Basis has firmed here in some areas. I'd sell the cash and put on some kind of vertical call spread and call it a crop year.

Pearson: Let's move over and talk about the livestock sector. And Erin, as you look at this market and all of this euphoria Virgil has been talking about in high corn, high bean, high wheat prices the flip side of the livestock producer has resulted in hugely expensive, very stressed cash flows. We're upside down. I want to talk about hogs in depth in just a moment but let's talk first about the cattle market. What do you see ahead fed cattle as we sit here tonight? What do you see down the road for that market?

Golly: Well, the fed cattle market has been dealing with a sluggish box beef movement for quite some time and that is due to total meat supplies and the U.S. economy and turmoil. One key thing to watch is if producers continue to market cattle early due to high input costs. If this continues it's going to keep pressure on the spot market which is why I recommend that producers purchase at the money put options through the June timeframe. But looking beyond that point I think there is excellent upside potential for the cattle market due to the accessibility and availability of prime and choice beef this summer. And I do think the acquisitions at GPS are also going to help with the export markets re-opening up this summer. So, I do feel strong about the cattle market, think that we'll be trading cattle well over $1 this fall.

Pearson: Alright, that's great news for cattlemen. They needed a good word. Flip side on the calf market what do you see happening there as far as the calf market is concerned? This is still a small cow herd, we've got droughts out in the west. What is your outlook? Should be pretty bright for a cow-calf producer?

Golly: Well, the cow-calf guys and the feeder market has been placed under a lot of pressure just because of the high inputs. The main factor that would drive prices higher, of course, would be the deferred fed cattle futures which I believe are going to move higher at a later point but right now at this point I believe that producers need to be putting floors underneath the markets just because of the volatility within the grains.

Pearson: Good strategy. Let's talk about hogs. We talked to a lot of pork producers lately, it's not a positive experience because of high meal costs, high corn costs. Weak demand out there, a lot of pork coming in. What do you see? What is happening out there? You've got a special view of that.

Golly: Sure, and I think we're through the tough times on pork prices due to the decreasing total supply going forward, because of all the disease issues we've had to experience in liquidation so far. I believe we're going to see one of the largest cash rallies in hog history probably going to happen after Easter into the May timeframe with a deferred futures testing all-time contract highs at $90. Mark, even with these high prices that I'm forecasting I do not believe the producers are going to be able to be profitable at that time.

Pearson: Even with record high prices?

Golly: Even with that just because the break evens are so high in the corn prices.

Pearson: The old statement always was cheap corn makes for cheap cattle and cheap hogs. The flip side is high priced corn makes for high priced cattle, high priced hogs. Even with that if these input costs remain the same you're saying that the break even for most pork producers is going to be negative?

Golly: I think it is going to be and probably for another six months once we reach those tops in the futures as well.

Pearson: What can you tell those producers? We've had liquidation going on. What about the international situation in Canada and all that, what's happening there?

Golly: We're continuing to see liquidation but it's happening at a lot slower pace than most people thought just because producers have a lot more agreements that they are tied into with sow collapse, with feeder pigs, with packing plants, with the feed mills and so it's going to be a lot slower liquidation than most people thought it was going to be.

Pearson: Of course, we're talking with Virgil about what's going on with this corn market and he's seeing higher trends for both corn and beans. Should we be trying to mitigate some of these losses by covering some feed needs now?

Golly: Sure, actually buying a cash meal for the hogs and your cash corn is very important but purchasing put options underneath of that corn would be, it's actually a very cheap option to do right now and I think you need to keep that put option in for the bottom side protection.

Pearson: Got about 30 seconds, livestock producers, pork producers out there, end of next year -- you see a rally in the cash market soon and much higher the deferred contracts twelve months out?

Golly: I do think so and for the hogs it's probably going to be into next year before we're looking for anything positive. I was looking for about an 18 month cycle of where it's going to be negative losses. We've gone through four years of profitability in the pork production so it's going to be a slow draw down.

Pearson: Well, as usual, some excellent analysis. We appreciate it. Virgil Robinson, thank you. And I'm sure you'd echo a lot of Erin's comments towards getting some feed needs covered on the livestock sector. So, we're going to leave it right there. Erin and Virgil, thank you very much. That will wrap up this edition of Market to Market. But before we go we'd like to remind you that many public television stations across the country are seeking your investment in quality television programming. If you value the information you receive each week on programs like Market to Market please help with your generous support. And be sure to join us again next week when we'll examine how the winds of change are powering new curriculums at one Midwest community college. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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