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Market Analysis: Oct 26, 2007: Virgil robinson

posted on October 26, 2007


With the corn harvest more than half completed nationally, basis improvement is being noted in some regions, while nearby wheat futures prices weakened.

For the week, December wheat lost 55 cents, while the nearby corn contract moved nearly 2 cents higher.

Higher crude oil prices and prospects for Chinese demand lifted soybean prices. For the week, the November contract gained more than 12 cents per bushel, while soybean meal was up $1.50 per ton.

In the softs, cotton gave back virtually all of last week's gains with the December contract posting a loss of $1.53.

In livestock, the October cattle contract lost 87 cents. Nearby feeders were down $2.25. And the December lean hog contract declined $2.39.

In other markets of interest, the Euro gained 85 basis points against the dollar. Nearby crude oil prices exceeded 92.00 per barrel briefly on Friday for the first time in history. Comex gold soared to its highest level in 27 years. And the CRB Index gained 3 points to close at 346-even.

Here now to lend us his insight on these and other trends is one of our long time market analysts, Virgil Robinson. Virgil, welcome back.

Market Analysis: Oct 26, 2007: Virgil robinson Pearson: Speaking of long-term, Virgil, I think we hit a high in the soybean oil market this week that was over 30 years, $92 crude oil, we have soybean prices above $10. If I look at virtually across the whole board of commodities globally prices are extremely high.

Robinson: Mark, I think you've struck a nerve, emerging economies, and I guess we can note a few here, Brazil, Russia, India, China. I sense at least in my work and the work that I keep no slowing in those economies but rather pedal to the metal, Mark. So, the demand for a whole host of commodities as well as other goods and services remains very, very strong, Mark, buying some kind of geopolitical catastrophe or some type of meltdown globally, economically I sense no significant slowing in demand.

Pearson: Alright, let's talk a little bit about the wheat market, slowed up a little bit from the amazing highs that we've seen for wheat prices in the fall of 2007, backing off some and, of course, backing off of some of those deferred contracts as well. What is your take on wheat right now, Virgil?

Robinson: Mark, the inverse, old to new, has made an adjustment as exports have slowed, they haven't collapsed, they've slowed, Mark. I think the theme of late has been acknowledging the fact that there will be an increase in U.S. and global wheat acres. An effort will be made to grow significantly more wheat over the course of the next several months. That, I think, has served to undermine the market and with that has come a phase of pretty significant long liquidation led by the old crop while new crop wheat contracts in Kansas City, Chicago and Minneapolis remain quite strong. Old crop wheat, Mark, I sold old crop wheat quite some time ago.

Pearson: As did everybody else at least that I've heard from, yeah.

Robinson: Did, in fact, re-purchase with a few simple option strategies, Mark, that did service well. Frankly I'm kind of done with the old crop. For those that still have old crop wheat I would feel more comfortable using some type of short covering bump which I anticipate will occur in the next 2-3 weeks, move through that inventory as the basis has firmed and demand remains strong and then re-purchase with some type of option or vertical call spread, kind of reducing the risks involved with that particular commodity. New crop, Mark, I know this sounds almost preposterous but new crop wheat futures, Kansas City, Chicago, they approach $7 I would like to purchase that at or near the money $7 wheat puts and I know they'll be expensive, they'll be 70 cents or thereabouts. But please keep in mind, in just the last three weeks wheat futures have moved over $1.30 a bushel. So, given the kinds of risks involved and the risk reward in wheat given today's price and what could happen if we see significant wheat increases production wise there could be a couple of dollar decline. I think it's a relatively justifiable strategy.

Pearson: Interesting, Virgil. Let's talk about the corn market and what you see happening there. Now, people are talking about fewer acres for corn, we have to see how this all gets sorted out, had a big bump in wheat acres allegedly on tap for this year, corn may be going down, beans going up. What is your take on the corn market right now?

Robinson: You know, I don't disagree with that logic, Mark. Conventional wisdom would suggest there will be a decrease year over year in corn acres to the tune anywhere from five to eight million, something in that vicinity simply because we do at present have a comfortable supply of corn. Now, again, there are wild cards a plenty here including the energy bill. Will there be increased mandates for biofuels including ethanol? My best guess is yes, there will. To what extent I don't know. That will certainly underpin those new crop corn values, Mark, in the '08 and '09 time slots. So, at this point in time I think the risks versus the potential rewards, rewards still outweigh the risks. So, I'm not inclined to do anything aside from perhaps minimum price in those deferred contracts. Old crop corn on the other hand plenty of supply between now and one year from now. I think -- I did this the last time we visited, Mark, I sold old crop corn and simultaneously put on a little option strategy. I still think that's pretty good logic for old crop corn particularly if you have it on farm storage.

Pearson: New crop sales, Virgil?

Robinson: Mark, I would do minimum price only and I know there again the premium on a put option, an at or near the put option is hefty but please be advised there is risks involved in this market over the course of the next couple of years. I think they are warranted and remember, you don't have hold an option to expiration. There are opportunities from the point of inception to expiration. So, I like that strategy, Mark.

Pearson: Alright, let's talk about soybeans, Virgil, maybe picking up acres. Over $10 in soybeans this week, Virg.

Robinson: Yeah, well, you mentioned earlier the contribution soybean oil, vegetable oil is making to the soybean market, Mark, and its correlation as well as corn's correlation with petroleum. Probably should be noted ethanol futures have recovered of late. Gasoline futures making new contract highs, Mark. So, again, I think it underpins to some extent the value of soybean, the biodiesel idea as well as the ethanol idea so that clearly is still in play and likely to remain so for the foreseeable future. Southern hemisphere will make an effort to grow a big crop of beans. There will be an updated WASDE, World Ag Supply and Demand Report Estimates report, Mark, on I think the 11th or 12th of November. I'm going to take a look at the combined production they're forecasting in Argentina and Brazil because of weather concerns. Will it remain at 109 million metric tons or will they make an adjustment? There will be a big crop grown down there weather permitting and as a result, Mark, at some point in the next ten to twelve months there will be some price pressure on soybean futures.

Pearson: Okay, so act accordingly if you're a producer out there and looking at increasing acres next year.

Robinson: Yes, I agree with that, Mark. And here again it's pretty difficult for me to say that making a sale at or near $10 is a poor sale given historic comparison. For those who wish to risk something near $1 probably nothing is necessary for those who can not afford that or choose not to, again, I'm going to opt for some type of option strategy, a simple put strategy or vertical put strategy and at least create a minimum price at an awfully attractive level.

Pearson: Absolutely. Let's talk about the livestock markets, Virgil, and what you see heading into the final quarter of 2007 for this cattle market. And you've talked about this before, virtually no expansion of the herd, demand has been pretty good. We actually went through a period I think last time you were on where we were actually seeing weights jump up just a little bit. What is your take right now?

Robinson: True, last time we visited, Mark, I was bullish and to this point that has been poor advice. The market has pulled back and I think the reason has been an awful lot of cattle, an awful lot of hogs have come to slaughter and weights have grown both live and dressed. Mark, I think that schedule, that slaughter schedule will decline given the placements we saw last summer and then the reduced placements that transpired from that point forward. We should be seeing smaller kill lists, small slaughter lists beginning in November and December. I think the realization of that will create some type of recovery in cattle futures as well as feeder cattle futures. I'd like to use that recovery in November and December to place at least some type of put, minimum price strategy or short hedges in the April, the June and the August cattle futures, Mark, at the $95, $97 and $99 level respectively.

Pearson: Alright, some good thoughts there. So, the calf market you're also fairly friendly too, I guess, because you see those levels.

Robinson: Well, you know, we discussed the fact that $120 was pretty stiff resistance, the market was not able to penetrate that level and has, in fact, fallen lower as have live cattle futures. Now, again, if live cattle futures recover as well as cash values the last two months of this calendar year, Mark, I think there will be a recovery in feeder cattle futures back towards the $114 to $115 area at which point I would place short hedges on the feeder cattle futures market.

Pearson: Alright, good point, Virgil. Let's talk about the hog market. You mentioned big numbers and that's the story in the hog pit.

Robinson: Amen, they've been large dating back the last several weeks and remain I think again slaughter this week, Mark, was 2.3 million head. Pork production is up three percent year over year. There's just an adequate to beyond adequate supply of pork. That is not to say there can't be recovery, I think there can be, Mark, simply because the futures markets at points in time just simply get over sold. I also like the price behavior of late in the pork belly futures market which sometimes lends support. So, I think there will be some recovery in there, in the lean hog futures market as well, Mark. Any combination of lean hog futures plus or minus a basis that equates to $45 or something near that I would hedge production through 2008 based on that number, $45 or thereabouts live.

Pearson: Wow, interesting base, Virgil. We've got about fifteen seconds, I just want to ask you real quick, this cheap dollar, it's been a plus for all these export markets. Any sign of a turnaround there?

Robinson: Not at present, Mark. The trend is firmly entrenched, looks like it's headed lower. There will be periodic recoveries but suggest there is a bottom in the U.S. dollar, I don't see it yet.

Pearson: Alright, Virgil Robinson, as usual some great analysis, some great ideas. Thank you so much for being with us. That is going to wrap up this edition of Market to Market. But if you'd like more information from Virgil on just where these markets might be headed why not visit our market plus page, it's on our Market to Market Web site where you'll also find, by the way, streaming video of our program. And by the way, you can download audio podcasts of our market analysis and our market plus segments absolutely free at our Web site. And, of course, you can join us again next week when we learn about the pitfalls and profits of non-pasteurized dairy products. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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