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Market Analysis: Dec 28, 2007: Market Analyst Virgil Robinson

posted on December 28, 2007


Wheat prices fell precipitously this week, while speculative buying supported corn prices. For the week, March wheat lost 64 cents, while the nearby corn contract moved more than 8 cents higher.

Despite some bearish fundamentals, soybean prices broke through the $12.00 barrier. For the week, January beans gained 30 cents, while soybean meal advanced $2.20 per ton.

In the softs, cotton put together another winning week, with the March contract gaining $1.31.

In livestock, December cattle advanced $1.40. Nearby feeders were up 50 cents. But the February lean hog contract lost $2.42.

In other markets of interest, the Euro advanced 356 basis points against the dollar. Crude oil gained $2.69 per barrel. Comex gold advanced $27.30 per ounce. And the Goldman Sachs Commodity Index gained eight points to close at 609.50.

Market Analysis: Dec 28, 2007: Market Analyst Virgil Robinson Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, good to have you with us.

Robinson: Hi, Mark. Happy Holidays.

Pearson: Happy Holidays to you. Happy New Year. What a year 2007 has been, Virgil. Let's talk about the wheat market. When we report a 64 cent decline in wheat prices and prices are still at these levels I think it just puts kind of a cap on 2007.

Robinson: Mark, the volatility in the wheat market could probably be best illustrated by the fact that in each of the last five months in the Chicago wheat contract the monthly range has been in excess of $1.50 each of those five months. That is likely to continue. A little something here maybe for both bull and bear, Mark, there remains some concern globally in a couple of exporting countries weather wise, most notably Argentina and India where there are select areas that remain dry. The Argentineans I think are concerned, of course, about the La Nina event which may trump all of our conversation tonight should it develop, Mark, and be a factor here in the U.S. this coming crop cycle. Wheat export sales, U.S. wheat export sales in the month of December while not terrible certainly declined noticeably from the previous pace. Perhaps that is beginning to smack up some rationing, Mark, and I buy that argument. If we were to close the futures market tonight and call it a month and/or a year we'd note this month to be quite defensive. So, as the wheat futures climb $9.50 to $10 I think they met pretty significant resistance in the form of less interest from some of our viable importers and I think it also increased some movement both old and new crop, Mark.

Pearson: Alright, and Virgil, you'd recommend that wouldn't you at these kinds of prices to be taking some profits in wheat?

Robinson: Mark, I look back eight weeks ago tonight when we visited and, of course, prices were lower and we suggested at that time selling old crop wheat and repurchasing with either a call option or a vertical call spread. Let's just assume the slate is clean tonight. I would do the same. I would sell the old crop wheat at market values and, with all due respect to relatively small and tight global and U.S. inventories and a crop prospect that could change that one year from now, I'd put together some type of option strategy to participate should the weather not cooperate here or globally or both.

Pearson: Alright, so, again, wheat producers take note. Let's talk about the corn market too, Virgil, at the end of 2007. Again, we've had over a year of the strong corn prices. Cash corn in many parts of the Midwest up above $4.25, $4.30. This is Disneyland for a lot of producers. What about making sales here, Virgil? Do we want to take any of the money off the table in this corn?

Robinson: Mark, again, in retrospect I have already made decisions with corn and sold corn, put together some repurchase type arrangements that have also maxed out to this point in time. Clean slate here tonight. I think there are some things that we need to visit about. One is January historically there's pretty good movement of grain traditionally in the month of January to accommodate cash flow needs. I suspect this year will be no exception. However, I think the majority of U.S. farmers are in pretty good shape financially, Mark, so it may not be as large as years past but certainly that is something to be concerned about. We just spoke about wheat and its bearish behavior the last 30 days. That certainly could be a factor coarse grain wise. I think there is probably a good argument here in selling some old crop grain, old crop corn, capturing the market that you have just referred to and then watch, Mark, through the month of February at least in the work I keep option volatility has a tendency to be at its lowest levels which would suggest then option premiums are cheaper or less expensive. I don't have any problem moving old crop grain and then putting together some type of option strategy in February. New crop grain, acreage uncertainties here, the La Nina event we referred to briefly, minimum price is my best suggestion there and that is the strategy I've employed, Mark, for the last several months.

Pearson: Alright, and it's a strategy that has worked well over the years, Virgil. What about this weather event? You mentioned La Nina, there has already been some rumblings about that. You mentioned Argentina, some of these dry spots. Typically a La Nina year is not good for the Corn Belt.

Robinson: That is correct and there are some very well respected meteorologists including our own here at Iowa State University that are concerned about a sequence of events suggesting a La Nina event here in 2008, Mark, which would imply sub-par or the potential of sub-par yields. So, in a year where we need to, again, grow a sizeable crop of corn to accommodate the domestic demand, the ethanol demand, the export demand, a sub-yielding crop would obviously be quite bullish, Mark. So, therein lies my rationale for not wanting to finalize the price of '08 and beyond but rather capture some type of minimum price, a floor that is very attractive, Mark, and perhaps even covers all input costs. I don't know what else to do under the circumstances here.

Pearson: Alright, good ideas, Virgil. You know, we talk about the battle between particularly corn and soybeans for acres and I've had a lot of calls this week and talking about the price they're paying for hay these days and they say, you never talk about that. Hey, we're battling for hay acreage out here too. Let's talk about soybeans. Record highs this week, record contract highs in the soybean market at the end of the year. Is this thin trading, holiday time trading, Virgil? Or is this real demand out there pushing these prices higher?

Robinson: No, I think, Mark, there's an argument here it's real demand. It is demand driven to this point. And, of course, there is a certain degree of speculative enthusiasm. I did note the CFTC report today and the combined position of non-commercial entities and that would include the commodity funds in the speculative community, Mark, has never been larger than it is tonight. Now, that I think injects a degree of volatility that we've never experienced before. So, as mentioned, January is approaching us here rapidly, there is normally a movement of grain from farmer, from country elevator to pipe. This year I don't think will be any exception. We could under those circumstances pull a dollar out of the soybean market or a dollar and a half, Mark, and still not alter the long-term trend of this market which is, in fact, yet up. Processing margins remain, at least based on the work I keep, profitable. Demand in all of those products, soybean oil, new life of contract highs or all-time highs in Malaysian palm oil futures, Chinese soybean oil futures, we're approaching it here in the U.S. The demand for that particular product remains strong and continues to grow. I see no signs of rationing at this point, Mark. The only thing that concerns me is as aforementioned a big position by the speculative community combined with what traditionally is a movement of cash to the pipe could create a draw down or a pull down in this market and it could begin as quickly as the turn of the calendar.

Pearson: What you're thinking is it will be relatively short-lived?

Robinson: I am right now, Mark, I am right now.

Pearson: Alright, let's talk, Virgil, about what's going on in the livestock, on the flip side of these high input costs both for soybean meal as you mentioned and, of course, for corn. And we look at what's going on in the cattle market today and it's not really a bright picture, Virgil. Are we kind of backing things up a little bit? Are we not current?

Robinson: Mark, beef production is one percent larger than a year ago. Live weights remain about unchanged from one year ago. The supply argument, not only beef but total red meat availability including pork and other red meats, the supply is very, very adequate to accommodate domestic and export demand. Yet in the same breath, Mark, when I looked at last week's cold storage report, given the fact we've had an unusually huge all-time record slaughter in hogs through the month of December and a big one in cattle, cold storage inventories of both beef and pork were drawn down month over month and year over year. The demand for that product remains strong. Recent pig crop report, obviously, a bearish report, Mark, would suggest that pork production in 2008 will eclipse record production of 2007. So, the supply argument is kind of a mute point. We had plenty of product. It's demand and the elasticity that is associated with demand and various economies including ours that remains an unknown. I think the demand for both those products is very solid. Given a three to five dollar rally in cattle futures from tonight's close I would sell cattle futures, Mark, out through August of 2008. With that kind of a rally pork futures, live hog futures should stabilize, perhaps improve as well. I'd use a three to five dollar rally in those to hedge pork production or hog production out through the fall of 2008.

Pearson: Real quick, Virgil, let's get back to that hogs and pigs report. Increase in the breeding herd. All I've heard from a lot of pork producers, concerns about high input costs and everything else, how are we able to accomplish that?

Robinson: Mark, I can't give you a breakdown of how -- I think technologies have improved significantly. We circumvented what could have been a disastrous disease issue with vaccines. That is probably a factor. There have been Canadian imports of both feeder pigs and finished and butcher hogs, Mark. That probably accounts for some of it but given the fact that we have had 30 some odd months of profitability in the farrow to finish operations in Iowa and southern Minnesota we've just overproduced at this point and we have ample supplies, big demand but I think it's going to be a difficult year for the hog producer, Mark, in 2008.

Pearson: Alright, and Virgil, again, flip side, covering feed needs?

Robinson: I think during the month of January where, again, we get this movement of grain that is our opportunity to cover and buy those inputs.

Pearson: Very good, Virgil, thank you so much. That will wrap up this edition of Market to Market. I want to thank Virgil Robinson for being with us. 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 examine the marketing efforts that have helped ethanol roar into the fast lane on the Indy car racing circuit. Until then, thanks for watching. I'm Mark Pearson. Happy New Year. Have a great week.

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