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Market Analysis: Nov 16, 2007: Market Analyst Darin Newsom

posted on November 16, 2007


Private estimates for reduced soybean acreage and increased corn planting made for volatile markets.

For the week, December wheat lost 12 1/2 cents, while the nearby corn contract lost 7 1/4 cents.

The reduction in private acreage estimates and increased buying by developing countries like China sent prices for soybeans to 19 year highs. For the week, the January soybean contract gained almost 22 cents, while soybean meal was up $10.50 per ton.

In the softs, cotton continued its downward trend with the December contract losing $3.74.

In livestock, the December cattle contract lost 20 cents. Nearby feeders gained a $1.10. And the December lean hog contract lost most of last weeks gain closing down $1.38.

In other markets of interest, the Euro lost 11 basis points against the dollar. Nearby crude oil prices dropped back from the century mark to the $95 range. Comex gold lost $47.70 an ounce. And the CRB Index went down a point and a half to close at 353 even.

Market Analysis: Nov 16, 2007: Market Analyst Darin Newsom Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, welcome back.

Newsom: Oh, thank you, Mark.

Pearson: Well, I was down in Hutchinson, Kansas last week and had a chance to visit some friends of mine down there and boy, I'll tell you, the east side of Kansas they can tell you some horror stories about the weather of 2007 and their frustration and with these high wheat prices we've seen this fall they didn't have anything to sell. What about selling the wheat crop for 2008, Darin?

Newsom: You might want to get some of it on the books. You know, we're looking at this market, we're looking at the rally, this incredible rally that occurred in 2006-2007 and what we're seeing is that this is basically just a supply driven rally, this is what we've talked about many times, it's exactly what the market looked like. We're over short wheat, still short wheat but the market has seemed to lose some of that steam and it's being reflected in the discount to the 2008 new crop July contract. So, you know, one of things we can look at is start getting a little bit on the books. But as last year taught us we don't want to get overzealous in our contracting because we don't know what's going to happen and as you said in the meeting in Kansas what might be a third to a half of your crop can all of a sudden turn out to be 75-100% and so you just have to be very careful with markets like these but certainly looks like we could put some on the books.

Pearson: Alright, obviously these have been strong prices. The old truism is short crops have long tails, is that what we're facing here in wheat?

Newsom: I believe it is and, yeah, I think so many of these things are coming to pass again. Even though the dynamics of the markets are changing the personalities don't change. We talked about the supply driven market, we talked about the short crop having a long tail. All of these things are playing out. Another one that's playing out in the wheat market is the bull needs to be fed every day and what we've seen in the wheat market is it's backed off a dollar and a half, two dollars in here just due to the fact that we know that there's a shortage, we know that there's been weather problems worldwide but what's next? What's the new thing? We saw a glimpse of that this week when the frost possibilities in Argentina brought up some ideas we might see some shortage of supply again, reduced supplied but it was very short lived, we only got a couple days rally out of that and then right back down, right back into our trend where we just continue to grind lower until something, until the next major news piece comes along.

Pearson: Alright, so, again, get something on the books, maybe not get too aggressive, I'm assuming we're going to lose the crop five times before we put it in the bin on the wheat.

Newsom: That's right. Just looking at these levels, 10%, 20% tops is what we're going to want to be coming out of the fall. You want to sit back, let it go into dormancy, then as spring starts up see what the condition in southwest Kansas, even the southern plains as a whole for the hard red winter and then maybe start to adjust some of our strategies at that point.

Pearson: Of course, we've got the soft red situation which has expanded dramatically too which could be a play on double cropping soybeans which could be a factor too.

Newsom: That's right and we're hearing the next big thing that's going to last through the fall and the winter and into the spring is this whole acreage debate. And right now we are hearing reports that there's going to be more soft red winter acres. This is going to be, you know, this is going to have a little bit of a bearish effect or put some pressure on the new crop Chicago market so very similar to Kansas City. Get some on the books, let's see what happens this winter, let's see how this acreage thing plays out and what the weather situation is going into the spring.

Pearson: We keep talking about buying acres in wheat, corn, beans, cotton. I talked to a hay grower this week who has had a record price for high quality hay, he said hay is going to try and buy some acres here too.

Newsom: It wouldn't surprise me at all, yeah.

Pearson: Well, let's talk about the corn market, Darin, and what you see happening on that front. Obviously it's going to be another wild winter it looks like in terms of corn being defensive this year as opposed to being on the offense like last year.

Newsom: That's a great way of putting it. Corn is going on the defensive right now and it doesn't have the impetus just to continue to rally because, you know, all the talk is that it might not lose the acres, it might be able to hold acres and as we've seen in some of the private estimates actually increase some acres next year. Will it be enough to meet expected demand? We don't know. But right now it is on the defensive and what that has it doing is turning sideways. We've got the December 2007 is dealing with this huge crop coming in and it's also had a little bit of a lack of interest from the non-commercial or speculative side up at these levels. So, we seem to be trapped in a $3.60 to $3.90 price range, can't get out of it. Longer term probably will, I think we're going to see another round of buying particularly if the dollar continues to weaken, we continue to see weaker export sales like what we saw this week, sales and shipments. A lot of things lining up to help push this market higher later but it's just in the doldrums right now, it doesn't have that spark to get through the resistance and create all this buying that could be coming yet. So, I think we're going to be looking at that for most of the winter so we've got some opportunities to make some sales in here, again, not get overly aggressive, let's play this thing out over the course of the next few months, see what happens. But we are going to have some opportunities as the winter goes on.

Pearson: Take advantage of those. This cheap dollar bottoming out at all?

Newsom: I don't think so. You know, you hear economists arguing one way or the other but I'm very concerned about what the Dow looks like right now, I'm concerned about what the dollar looks like. I know we're trading right around 75 in the U.S. dollar index. To me I ran some numbers, it looks like it could still come down to about 68, 69 so there's still some more sliding to come in this thing. Interest rates will probably continue to come down. Hopefully that might prop up the Dow Jones but that looks like it has some problems as well. There's some indicators out there that make, you know, commodities look like they're going to remain strong. Just how much strong until we start to see inflation really get up and go away and take off, really start to cause a problem with people not wanting to push commodities as high. I don't know that we're there yet. But, you know, we talked about gold being off $37, just an incredible week, crude oil bouncing between $95 and $98. I think this is just the tip of the iceberg. I think there's a lot more to come because the situation itself, the underlying situation, economic situation is not changing at all.

Pearson: Alright, let's move over to soybeans, again, extremely volatile. 19 years highs now, $11 beans, been a long time. I was a young man, I was your age when we had beans that high. Where are we going here? We've got $11 beans, I'm sorry, the world I live in that's got to be a sale.

Newsom: Well, you would think so, but, again, the dynamics of these markets have changed and one thing that we've noticed is that the round numbers don't mean what they used to and $11 is a big target. I mean back in 1988 we hit $10.99 1/2 and we just couldn't quite push that.

Pearson: It seemed to blow right through it.

Newsom: Yeah, looks like this year we've got the -- we're about 11 cents away from there right now and we should be able to move through there. There is enough interest in this market, there is enough buying coming into this market. We saw China making another purchase today. This looks like it could go, I ran some numbers again on this one, looks like 12.5 to 16.5 and really without batting an eye. What all is going to have to happen to cause this? Well, I think the biggest thing is we're going to see the U.S. stocks really start to pull down. There's talk of it coming below 100 million bushels, I think it's a very strong possibility. Whether or not the reports actually ever show us going below 100 I think the perception on the floor will be that we're actually going below 100 and this is going to be what propels us higher. It's going to take some time but right now we're in the throws of a very strong up trend but I don't know that $11 is going to put the brakes on it.

Pearson: Talk about South America. You mentioned the cold weather in Argentina which, again, was kind of downplayed later in the week but obviously there's been concerns about crop issues down in South America, it hasn't been a perfect start down there.

Newsom: Hasn't been a perfect start. Now, the crop that is coming off looks like it's in great condition so we're still hearing projections of very large numbers coming out of Brazil, very large numbers coming out of Argentina. What this is doing is helping the '06-'07, you know, it continues to add to those ending stocks and creating larger ending stocks, beginning stocks here in '07-'08. So, that could -- one would logically think that's going to slow this up trend but we just simply haven't seen it. We didn't see it at all basically through '06 and '07 where we had ample stocks and the up trend continued. It looks like we've got other things to play in this market, concerns further out beyond this next harvest in South America that is going to continue to push this market higher, going to continue to pull dollars into this market.

Pearson: Alright, on that bullish note on soybeans let's talk about what happened on cotton this week which was certainly less than bullish. What's your take there?

Newsom: It's the opposite situation. Cotton has tried to follow some of the other markets higher. We've seen these commodities all rallying on the weakness of the dollar but unfortunately in markets like cotton where the underlying fundamentals just simply don't provide any support, we've got plenty of supply, we've got plenty of supply to meet demand and so what we're seeing is when the specs are in this market, when the non-commercial traders decide to get out and take some profit, put some in the bank there's really nothing underneath this market and it starts to freefall and that's exactly the situation that cotton is in right now. Certainly looks like it would come down to about 56.5. If that doesn't hold it, it's probably heading back to the low 50's and it probably won't take too long to get there. So, this is a market that could see some more pressure over the coming weeks and it does need another round. It needs an infusion of money coming in to help support it at this point.

Pearson: Acreage battle isn't an issue there for cotton?

Newsom: I would think so because talking to folks over in the southeast and the delta they're thinking why isn't the market fighting harder to get these acres. But right now it just seems to be kind of a forgotten crop because it isn't really fighting that acreage battle. Now, that doesn't mean that it won't. Over the winter we might see that money come in, we might see the support come into the market that says hey, we're not ready to give this up, we're not ready to move everything from soybeans and corn and wheat and everything else. It might be willing to fight for the acres but right now it just doesn't look like it's wanting to.

Pearson: Let's talk about livestock, flip side of this whole equation, these high costs and $10 move in soybean meal this week. Cattle market has performed pretty well, a lot of red meat out there, we keep hearing that with the hog issue. But let's talk first about fed cattle. What do you see happening there as we hit the end of 2007, first quarter of 2008?

Newsom: Normally this is a time when we can start to rally the market pretty well and I know now as we go into 2008 a lot of it has to do with the weather and do we get these big storms moving across the plains and everything else. But we're going to have to get something to break the market. It's been in a lull here for the last three or four weeks, you know, the futures just trading sideways, cash is staying in that 92, 93. I think we bumped cash up a little bit this week. We really need, again, we really need something to spark this thing. Is it a weather event? Is it this next round of buying coming in? I think it's going to occur because normally as December goes into expiration we start to put this market into a rally, cash follows along. I am expecting to see the same sort of thing. So, I think we can see the cattle market move up. I think we can see better times ahead over the coming weeks, just kind of shake the dust off this thing a little bit and hopefully we can re-energize a rally.

Pearson: Alright, any expansion in this cow herd in 2007-2008?

Newsom: Looking at the numbers what they're expecting I would say we could see some.

Pearson: One percent?

Newsom: I would say it's not going to be much more than that, one maybe two percent. Other than that I don't really see it changing all that much going into 2008.

Pearson: Is that what's keeping this calf market so good?

Newsom: I think so, I think that's really helping to support the calf market despite some of the other things that are going on when you look at the feed and everything else. I think that is helping to support the calf market.

Pearson: Of course, new rations are being used out there and I think that's helping out a lot too. Let's talk about the hogs, the miracle turnaround story in terms of production. I mean, these hog kills have been huge.

Newsom: Yes, they have and that's one of the things, you go back and you look and that's one of the things that is putting pressure on this market. Now, what's interesting to me in the hogs is a couple of developments that we've seen over the last couple of weeks, hogs -- in the futures market and cash -- have just been getting beaten up with this high slaughter levels and everything else, a lot of meat available. But what we're seeing is October, November is when the next long-term cyclical low should occur. We've passed October's market and continue to slide. We came into November, market was still in a little bit of a down trend but all of a sudden last week or two weeks ago we saw this spike in the market, in the December contract. It held its ground, lost a little bit this week but held its ground overall. What we're seeing in the latest CFDC report now is that the non-commercial or spec traders have moved from a net short position to a net long. What this could mean is that we could be getting ready to turn this market towards a more seasonal rally heading up into the spring giving us better opportunities to sell, to lock in some profits or lock in some sales later on. Now, does this mean the cash market is going to automatically turn around? We've still got a lot of meat to get through. But it certainly is indicating that there could be a bottom coming in this cash market, that we could start to see some strength coming into the winter, possibly moving on into next spring.

Pearson: Alright, the Christmas ham rally.

Newsom: The Christmas ham rally, absolutely.

Pearson: Darin, as usual, some great insights, we appreciate it. Darin Newsom being with us this week and that will wrap up this edition of Market to Market. But if you'd like more information from our astute analysts 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 the bonus market plus segments absolutely free at our Web site. And be sure to join us again next week when we'll see how the kindness in one community kitchen reaches halfway around the world. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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