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Market Analysis: Jan 25, 2008: Erin Golly and Virgil Robinson

posted on January 25, 2008

Matching Wall Street, the grains had a volatile week. Corn was whip-sawed, going limit-down one day and limit-up the next.

For the week, March wheat lost 30 cents, while the nearby corn contract closed just shy of the $5.00 mark staying even from Friday to Friday.

As the market ponders the tightness of ending stocks bean prices declined. For the week, March beans continued their downward trend and lost another 21 cents. Soybean meal followed suit losing $4.30 per ton.

In the softs, cotton went backwards and lost all of what it gained last week and more as the March contract was down $2.84.

In livestock, February cattle gained 40 cents. Nearby feeders were up 93 cents. And the February lean hog contract added $1.23.

In other markets of interest, the Euro gained 39 basis points against the dollar. Crude oil went over $90 gaining almost 80 cents per barrel. COMEX gold gained $29 per ounce. And the Goldman Sachs Commodity Index gained 3 points to close at 600-even.

Market Analysis: Jan 25, 2008: Erin Golly and Virgil Robinson Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Virgil Robinson. Welcome back both of you.

Both: Thank you.

Pearson: Well, let's talk, Virg, a little bit about the volatile week that was. When we have a week that is this volatile and, I mean, it was across all sectors, it was volatility come grand. When I look at the equity markets, the commodity markets, everything what is this showing us? Are we getting a little too frothy in everything?

Robinson: Well, there is an argument in that direction, Mark, but I think underpinning several of these markets to include wheat, rice, corn, soybeans, alfalfa, a whole list of these type commodities, Mark, is the fact that demand remains pretty darn strong both domestically and in terms of our export sales. Now, clearly helping us in that direction is the value of our dollar which has shown some recovery, Mark, but certainly it would be very premature to suggest the dollar has bottomed. I don't think that's the case. I'm watching that, however, as carefully as I can, Mark, the U.S. dollar index and it would appear to me if we can catch some type of a close above 80 on any of the nearby futures contracts then I think the trend might well be changing. So, that's clearly worth watching here as we look forward in terms of our ability to continue export and remain competitive in worldwide.

Pearson: Let's talk about the wheat market. Demand extremely strong there but, Virgil, that looks like kind of a different deal because you mentioned the demand market certainly there for soybeans, certainly there for corn but the wheat market, is that more of a short crop with a long tail phenomenon? Or do you see consistent worldwide longer term demand for wheat?

Robinson: I think the demand element is there, Mark. Export sales while they slowed through December we've seen kind of a resurgence here in January. So, to suggest that our sales ability has waned would be misleading, I don't think that's the case. Elasticity in that commodity as well as rice while there is some and there are abilities to substitute not readily -- and, again, until we can regenerate wheat supplies and there will be an effort made in 2008 to do that here in the U.S. as well as globally, I don't think wheat is going to drop out of bed so to speak. Are we pricey? Well, by historic comparison certainly we are. We have not been at these levels ever before. To say I'm seeing or personally seeing very visible rationing of that commodity I have not seen that to this point.

Pearson: What about production for 2008? It would seem like there's a huge incentive out there for the world which can produce wheat to do so.

Robinson: We'll have an update here on the 8th of February, the world ag supply and demand estimates report, Mark. Eyes will be focused on several of the exporting countries including probably most importantly Argentina here. There are also some forecasts, and you're familiar with these, regarding the U.S. growing season, some concerns about dry, unusually dry weather developing in parts of Texas, parts of Oklahoma, parts of Kansas so clearly that underpins the market to some extent as well. Use of options, Mark, and I drum this all the time, I think are important here and for those who are not well educated in that direction it's probably worth an effort.

Pearson: Alright, let's talk about what you see ahead in the corn market and, again, it's a battle for acres going on out there and corn has softened up just a little bit this week. What do you see ahead?

Robinson: Mark, the economics in the corn market remain pretty strong. Export sales, while they have slowed to some extent week over week, to suggest they have come to a screeching halt would be far from true, they remain strong. Ethanol economics, dry mill ethanol economics remain encouraging, Mark. There is room there for some advancement in price in an effort to source that commodity. Erin will probably address consuming units, animal consuming units in the next few minutes. I don't personally sense, with the exception perhaps of the hog herd, any serious liquidation or rationing going on there either. So, the demand base for corn domestically as well as worldwide wise remains strong.

Pearson: Alright, so good demand ahead for corn. Soybeans, again, the other factor in the big acreage debate of 2008. Prices have to stay strong. Again, we've softened off just a little bit this week. You talked not too long ago about we've seen maybe a pull back in January. Is this it?

Robinson: Well, we saw a little pullback in the basis in some areas, Mark, and to some extent the futures markets. Again, kind of a tough item to talk about at least in my mind. I'm a little concerned that in each of the last two weeks the cash index that I track, the soybean cash index has closed lower in each of the last two weeks given the fact we've had some pretty darn bullish news. So, perhaps that is a precursor to problems in the future. I'll be anxious to see, again, the WASDE report on the 8th specifically taking a look at Argentina's crop size and Brazil. In the interim, Mark, again, export sales remain pretty strong, soybeans, meal and clearly in oil. Oil has kind of separated itself at least in my opinion in terms of leadership, it is the leader as we visit tonight. But be advised just in terms of something visual to track it would be my opinion that at the end of this month, January, next Thursday should soybean futures, the lead contract there which is the March, close below $12.30 that to me is a warning there is something awry in this bull market. The same could be said of soybean meal. A close below $3.30 basis the lead meal futures contract is in my opinion a very serious warning that something is changing fundamentally or underlying the soy complex markets. So, those are two things visually we can watch.

Pearson: Alright, now a producer standpoint, a lot of producers are out there talking about increasing acreage, maybe returning more to levels they were at prior to 2007 but maybe 69 million acres in soybeans being planted. What would you recommend for a producer right now? What should he be doing?

Robinson: I think minimum price is a viable strategy, Mark, and in those markets where they can in fact find a cash buyer where the basis is seasonal or near seasonal I'm not against making a cash sale with some type of repurchase strategy in the month of February.

Pearson: Alright, real quick, Virgil, cotton market, talked to some cotton growers this week and they're a little concerned about acreage buying away from cotton acres. What do you see ahead for cotton?

Robinson: Well, new crop cotton futures poked above 80 very briefly, Mark, and that to me seems to be an area of very, very substantial resistance. So, as the new crop cotton future, December in this instance, approaches 80 I'm willing to sell it. The weekly or monthly close above $80 basis new crop cotton futures, new gain, new game. I would get aggressive then and repurchase some of that inventory. But until that occurs I think $80 is rock hard resistance. I'm a willing seller from 77 to 80 cents in new crop cotton futures.

Pearson: Think soybeans will buy some cotton acres?

Robinson: Perhaps, Mark, but, again, we've got a real competition going on here. Probably a little early to designate which of these commodities, and the list is about that long, takes precedence. I'm reluctant to do that. I think corn has been acquiring some acres here the last few weeks, Mark.

Pearson: I think you're right. Alright, let's talk about the flip side of all this big bullish news on corn, the flip side is a livestock producer. Erin Golly, as you look at this market right now let's say you're a cattle feeder, how do you make it all work right now?

Golly: Well, first off I want to talk about the cattle on feed report that came out today. It was a lot more bullish than people had expected especially in the placements. But because of the corn situation and talking about what's going on in the economy in the United States and around the world I'm very concerned for the fed cattle market through the first two quarters of this year. And, of course, it's the corn in the recession but the reasons I'm concerned going forward is this, is that funds are majorly long in the futures market especially in the live cattle. And if we start to see cattle prices move lower and corn continues to stay where it's at or move higher I think we could possibly see liquidation within the cattle herd and liquidation within the futures market.

Pearson: Alright, so first few quarters, like you say, could be pretty rough on the fed cattle side. And the recession talk, no one is confirming it but there's certainly a lot of recession talk out there putting pressure on it. What would you recommend? What kind of a strategy would you recommend? And let's talk about the second half of 2008, could that look better?

Golly: I think it will look better. Risk management wise just buy at the money puts is the best option, cover your feed needs, get some minimum pricing in at least but buying at the money puts is the best way just because South Korea did come out this week and state that they might be letting U.S. beef back into their markets sometime in the near future and keep in mind that South Korea was the third largest importer of U.S. beef back in 2003 prior to the BSE incident.

Pearson: Alright, so second half what kind of numbers do you see? What kind of prices do you think this fed cattle market will be? A low for the first quarter, first few quarters of this year and then what do you see for the second half of the year?

Golly: Price wise I don't want to give you prices on it just because I don't know where the corn market is going to be. We have the congressional budget office came out and they said they're estimating that we're going to reduce corn acres by 5.8 million acres and we've got a March planting intentions report coming up, that could mean an awful lot and so I really would like to see those reports come out and see where we're going to be for price wise.

Pearson: Alright, let's talk about the calf market which has been clubbed here recently as this corn market jumped up. What is ahead there? This corn market softened up a hair this week. We saw feeders move up a little bit on the board. What is your take on all that?

Golly: I think they're just keeping a close eye on what the fed cattle market is doing, what corn is doing. I know the West has gotten some, has received some very good precipitation, we'll probably be putting a large number of head out there to be grazed this summer which will help cheapen up some feed costs. But corn is the big obstacle with the cow-calf and with the feeder cattle and it's going to continue to be so.

Pearson: Alright, as this whole movement moves forward are we going to see more livestock, especially on the cattle side, kind of centered around a lot of these ethanol plants, take advantage as Virg mentioned of those DDG's?

Golly: I think a lot of them have and there is some new construction around. I know the one just around Wall, Iowa, there is a new cattle facility that is going up right behind there. So, we're going to continue to see that. The shipping rate is always a great distance if you have to move the DDG's a long way. So, I do think that's going to continue.

Pearson: Alright, let's talk about hogs and what you see happening there. Virgil mentioned potential liquidation, now you've talked about potential liquidation. I'm hearing from producers saying it's happening right now with what these sow prices are. What do you see ahead?

Golly: Well, Canadians, of course, are liquidating massively. My debate about liquidation in the United States is this, I think we are seeing some liquidation but that is going to be offset by producers still expanding. I know that producers are still expanding into this market so those two things could just offset each other. But I've been up at the Iowa and the Minnesota pork congresses and everyone just wants to know how they're going to get through this thing. And quick story I'll tell you is how I do that, is that the trucking industry one year ago today we were at $50 crude and we were at $90 crude they were in a panic mode and now they've gotten over it and it just takes time but we'll get through it.

Pearson: It's all flipped since then. Thank you so much Erin Golly and Virgil Robinson. Thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Erin and Virgil on where these markets just may be headed why not 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 free at our Web site. And be sure to join us again next week when we'll visit a rural community that fell victim to flood conditions in the early 1990's but is still kicking thanks in part to an influx of farmers. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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