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Market Analysis: Dec 21, 2007: Darin Newsom talks about the Markets

posted on December 21, 2007

Wheat prices trended lower this week, while speculative buying pushed corn higher. For the week, March wheat lost 30 cents, while the nearby corn contract moved 5 cents higher.

Prospects for rain in the southern hemisphere failed to dampen soybean prices. For the week, January beans gained another 20 cents, and soybean meal advanced $2.30 per ton.

In the softs, cotton stayed on the positive side again this week, with the March contract gaining 73 cents.

In livestock, December cattle declined 50 cents. Nearby feeders were up two cents. And the December lean hog contract lost 58 cents.

In other markets of interest, the Euro declined 53 basis points against the dollar. Crude oil gained just over $2.00 per barrel. Comex gold advanced $18.30 per ounce. And the Goldman Sachs Commodity Index gained more than three points to close at 601.50.

Market Analysis: Dec 21, 2007: Darin Newsom talks about the Markets Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Darin Newsom. Darin, welcome back.

Newsom: Thank you, Mark.

Pearson: Well, as a boy from Kansas I know you watch that wheat market closely. Backed off a little bit this week. I've got to ask you the question I've been asking all of our analysts. Basically in the wheat market we've got a situation where very strong demand for very few bushels of wheat that are out there. Short crop, we'll have a long tail?

Newsom: We could. As you say this is a picture perfect example of the supply driven market, the typical type of weather market that we see when we have this incredible rally, this spike rally and we saw this in the 2007 market so far. Will it carry over into 2008? You know, usually when we see this sort of situation it comes from the fact that maybe the U.S. has some problems or European Union or something like this. But in 2007 what we saw was not only did the U.S. have weather problems but Australia, Ukraine and so many other key producing areas. Argentina just went through a freeze late in their season. So, this is an atypical weather market to a degree in that it's so widespread. So, will the effects be felt longer? Will we continue to see the markets have some support going on out into the 2008-2009? I'm not convinced that we're going to see these same types of numbers. I think the possibility is there but the market itself is sitting back. If we look at the price differences between the old crop and new crop contracts there is a wide difference because the supply market is continuing to drive the old crop, new crop is lagging behind a little bit waiting to see what develops. We just had a foot of snow in parts of the southern plains over the last week or so. So, the conditions right now aren't that bad but they weren't that bad this year either, last year at this time either. So, it's a wait and see sort of thing. We could obviously see some support next year, it's just too early to tell.

Pearson: Alright, so with that in mind and like you say just continuing to have problems growing the crop anywhere around the world this year we could see this rally extended somewhat?

Newsom: We could. You know, right now we've got talk of wheat going, crossing past $10 going to $11, $12 and then by next harvest possibly coming back to $7 or $8 if things hold together, if weather cooperates. But if not, if we don't see this happen and if we don't see some type of replenishment of the supply, this supply market could indeed carry over and we could see an extension past the $11, $12 and who knows how high the high might be next year.

Pearson: Alright, so that may cause some people to maybe not make some good decisions about making sales right now, Darin. I mean, these are profitable levels.

Newsom: Wheat is so much like all the other markets. Now, most of the '07 crop unfortunately there's just not much to sell. But as far as forward contracting into '08 it's been very slow and you want to just do a little bit at a time and you don't want to get too heavy into these forward contracts. You want to sit back, have most of the grain available at harvest time, wait until you know what you have and see what the market is doing or at least until we get a better feel for the development. So, yeah, I would say it's just a little bit at a time. Don't move into this market too fast and let's see what happens as we go into '08.

Pearson: Alright, well let's talk about the corn market which, again, demand driven market sparked again now with the energy bill and what we talked about earlier in the program regarding demand for corn, demand for ethanol. What is your outlook now for this corn market going forward now that we have had that piece of information put to bed?

Newsom: Corn is probably the most fascinating market to me and you hit it right on the head when you said it's a demand market and it's a very clear distinction between that and the supply market of wheat. Demand is growing in corn and on Friday what we saw was basically a hat trick performed by the March contract. We went through some key resistance on the chart at $4.37 on the long-term continuous charts. It went through its old high of $4.43 on its own weekly chart. And the cash index looks to close over $4.07 which was a key point from last February. So, we have all three of those indicating an extension of this rally coming into 2008. Demand markets are characterized by higher prices over a longer period of time and what we're trying to do at this point in the market is find our parameters. What is high and what might low be? But if we have problems, if indeed we see lower acreage, if we have any types of weather problems in the Corn Belt and we add a supply situation, a short supply scare onto our demand market this thing could explode, this market could really get hot, it could be the next commodity to take off. I've been projecting $6.10, $6.50 for 2008 simply because it looks like this type of situation could build. It's there, the possibility is there. Will we see it? It's going to take some time. Probably in the December 2008 contract which is already trading well over $4.60.

Pearson: Alright, and $4.60, again, what is the risk out there with input costs where they are with anhydrous, seed and everything else? Doesn't it make sense maybe to lock in some kind of a floor on this product?

Newsom: Maybe a little bit. I've been a little bit reluctant to do it because of the situation, because of the structure of the market there is very narrow spreads going out into the '08-'09 contracts meaning the market is getting afraid of what the supply-demand situation might be as well. We might want to reward that by sitting back. As we go forward this $4.60 is hard to pass up, get a little bit on the books. It's hard not to. But let's keep an eye on what this thing could become if supply does become a problem.

Pearson: Alright, could we see a similar explosion in soybeans?

Newsom: Soybeans probably not, we're going to probably see that explosion carrying through from the '07 year early into '08 rather than late in '08. We're in a tight supply situation now with a strong demand situation. The sort of situation that we're describing could occur in corn later this year. Right now U.S. ending stocks are expected to come down to right around 100 million bushels, probably not below, it just doesn't go below 100 million bushels. The ending stocks are supposed to come down. We have the strong Asian and European demand for biodiesel continuing to push the crude oil, heating oil and soybean oil markets higher which is helping to pull soybeans along. So, we have a very strong market right now. How high can this thing go? Right now the old target is sitting up there at $12.90 from 1973, it looks very possible that we're going to get there, cross over into the $13. $15, $16 is not out of the question through the first half of 2008. It certainly looks like the market structure is going to make that available.

Pearson: $6 corn would tend to indicate an early teen bean price wouldn't it?

Newsom: Right, and if we look at that type of ratio, if December 2008 corn is able to get to $6, $6.50 that's going to certainly help the November bean contract if we keep that historic 2.3 to 2.7 price ratio in place. If not we're going to skew that ratio and we're going to start to see how these markets trade as these price relationships start to get out of line.

Pearson: Right now what is your feeling on soybeans? Again, we're looking at very strong prices, the highest prices some of these farmers have seen in their lifetimes.

Newsom: It is and just like we're doing in the other markets we're taking a little bit at a time. Over the course of this '07-'08 marketing year the stuff that's in the bin right now selling a little bit every month just to make some sales because these prices are too attractive to pass up. As we go into '08-'09 because of the different situation and what we're seeing in corn maybe be a little more aggressive in the forward contracting than we would in corn because, again, acreage is supposed to be better, weather is always a question but let's get some on the books. These prices are very attractive.

Pearson: Let's talk about the cotton market which also plays into this whole acreage battle. What do you see ahead there?

Newsom: Well, it's interesting in the cotton market that we just moved up, you know, we talked about corn breaking through some resistance, cotton is in the same sort of situation up around this 65, 66 area. If we can get through there it looks like the summer contracts could possibly rally back to where we were in the 2003 year up to the 84, up to the 85. It's got some support coming from the fundamentals as well. It had a little bit of a short crop. Possibly lose some acres again to soybeans and some other markets for the second year in a row, see some reduced acreage. This market is also looking pretty bullish in here right now. It's going to need some help, it's going to need to maintain the enthusiasm we've built over the last few weeks but it certainly looks like it can, it certainly looks like this could push it higher.

Pearson: Flip side of all this, half corn, half soybeans fed livestock and a show doesn't go by that I don't hear from a cattleman out there, hog producer saying, hey on my side of this thing it isn't all that great. Let's talk a little bit about that. And the fed cattle market I don't want to say it's been a disappointment but I know a lot of people were looking for stronger prices.

Newsom: They were. Coming into December they were thinking that we were going to start to see some lighter numbers in the yards and they were going to start to see some stronger cash prices. It just didn't happen again this week. Packers sat back on their bids throughout the majority of the week. Thursday they started to trade $90, $91 and $92, that pretty much cleaned up the list for the week. If we look at the future spreads and we see that the fed is holding a very large discount to the April it's not indicating to me like we're going to improve this situation any time soon. Cash market is going to stay under some pressure the next two weeks, you know, we're going to see some holiday shortened weeks, packers aren't going to be as aggressive. I think we're going to continue to see some pressure in the cash market and that is going to put the pressure on the futures market as well, possibly start to take it down below some of this technical support, $95, $96 area. Once we break through there we're going to start to create some non-commercial, some speculative selling. This thing looks a little bit messy here over the next 30 to 60 days.

Pearson: One thing that we always keep an eye on are those near-term supplies and whether or not we're current in this market and we seem to be backing things up a little bit.

Newsom: We do and this is always a bad sign. When I was working with producers, working with cattlemen, when you start to get reports that they're backing things up on the show list, they want the higher prices, they're going to see if they can get them usually there is a washout coming and very seldom does that actually work to make this market stronger. It doesn't, you know, looking at the structure, looking at all the things that we're looking at in the market doesn't look like it's going to help it this time around either.

Pearson: Alright, of course, weather is another key factor. But let's talk about the calf market and what you see happening there. Been really pricey all the way along, pulled back a lot this fall as this corn market has rallied again. What is your take for the cow-calf guy for the next 12, 18 months?

Newsom: You know, they can usually ride through these swings in the cattle market a little easier because they've got a demand for their product. But even then as you point out we've seen the prices coming down. If this corn market continues to go up and the cattle market really comes under pressure this winter it looks like it's going to start pressuring this cow-calf market as well. These things could continue to work lower. I don't think they're going to come down to the degree that possibly might happen in the live cattle market. I think we could see them have some support in there but they are going to see some pressure. I just can't help but think that they're going to come under pressure as well in this market.

Pearson: Big numbers in the hog business. Bottom line, that's impacting this cattle market as well, particularly retail. So, what do you see ahead for hogs? Do we have a lot of vertical integration or are these guys going to shut down the production spigot?

Newsom: The slaughter numbers have just been astronomical. We were running 430,000 head almost daily again this week. There was talk that we might see a 2.4 million head week. It's just incredible numbers putting a lot of meat in the marketplace. The hog market looks very sloppy to me. Although, I'll hedge this a bit, throughout this week even though the cash market was very weak this week we saw the spec traders before the end of the month into the year next week covering some of their positions, providing a bit of a floor. Now, if we go back to the long-term seasonals, long-term cycle this would certainly indicate a low is coming in. Can it hold off of this type of slaughter? I don't know. Market looks, like I said, pretty bearish at this point.

Pearson: Alright, appreciate it Darin very much. Darin Newsom, appreciate your insights. That will wrap up this edition of Market to Market. Now, if you'd like more information from Darin on just where these markets may be headed why not visit our 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 at our Web site. And, of course, be sure to join us again next week when we'll examine the political outlook for rural America heading into the Iowa caucuses. 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