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Market Analysis: Aug 24, 2007: Virgil Robinson, Pioneer Hi-Bred International

posted on August 24, 2007

Professional Farmers of America predicted Friday that U.S. farmers will harvest 13.1 billion bushels of corn this year with an average yield of 153 bushels per acre. Again this week though, the real action was in the wheat market.

For the week, September wheat gained more than 53 cents, while the nearby corn contract moved 13 cents higher. Both the corn and bean markets are following wheat higher, and coupled with concerns that flooding may have an impact on production, soybean prices also moved sharply higher. For the week, the September contract gained more than 37 cents, while soybean meal was up $11.60 per ton.

In the softs, cotton recovered about 25 percent of last weeks losses with the December contract posting a gain of 85 cents.

In livestock, the August cattle contract gained $2.42. Nearby feeders were up $1.15. And the October lean hog contract gained $3.15.

In other markets of interest, the Euro gained 194 basis points against the dollar. Nearby crude oil prices lost 89 cents per barrel. Comex gold gained more than $11.00 per ounce. And the CRB Index lost nearly 2 points to close at 305.75.

Market Analysis: Aug 24, 2007: Virgil Robinson, Pioneer Hi-Bred International Pearson: Here now to lend us his insight on these and other trends, one of our senior market analysts, Virgil Robinson. Virg, good to have you back.

Robinson: Thank you, Mark, nice to be with you.

Pearson: Alright, well, wheat market recovered, jumped up. What's ahead? Now, we track Chicago wheat on this show and I know we've got Kansas City and Minneapolis out there and viewers in all three of those markets. But let's talk Chicago for the time being. That's a big move.

Robinson: Okay, Mark, I think of interest tonight the weekly settlement on the continuation chart is the strongest weekly settlement since the inception of wheat futures. So, pretty silly of me to say the trend is down, obviously it's not. However, the three markets you alluded to, there is one thing on common that we can bring to our viewer audience and that is based on a lot of the indicators that I track and try and keep abreast of, Mark, they are all in areas that "are overbought by historic standards". So, clearly that is a warning that the market is susceptible to some type of behavioral change in the near future. The indicators are very similar to the state of the soybean market about five or six weeks ago when very suddenly the market went through a convulsion of sorts and pulled back sharply. So, I would not be surprised at any point in the very near future to see a correction of pretty significant nature in the wheat futures. Doesn't mean the trend of the market is over but rather a corrective behavioral pattern is soon to commence in my opinion. Pretty good time to sell wheat, Mark.

Pearson: Yeah, I was going to say, do you have any reasons not to sell wheat?

Robinson: Now, I'm talking specifically about old crop. There is big inverse, old to new. I think new crop futures, Mark, the July Chicago futures contract, again, the amount of time it spent at $6 and higher has been relatively sparse over the course of the last many years. Probably prudent to put together some type of minimum price strategy as those new crop futures poke above $6.

Pearson: Alright, and you'd start in July next year?

Robinson: Yes, correct. That's what I'm alluding to.

Pearson: Alright, excellent. Virgil, let's move onto the corn market. Again, new crop survey out, pretty good one, 13.1 billion bushels. People seem fairly comfortable with that. There is some concern about the moisture but not that much. What are you telling a corn producer right now maybe who still is holding onto old crop? What are you telling them to do?

Robinson: I'd sell it, Mark, at the market and concentrate my efforts on new. Again, there is some argument here amongst analysts that we've perhaps seen our seasonal or harvest lows. I'm not quite ready to buy into that argument. I understand the underpinnings to the market are quite strong. There are a few things though that we should probably note tonight. International Grain Council suggesting that global corn production will be in the vicinity of 755 million metric tons which is up from last year's 696, Mark. As you alluded to tonight Pro Farmers' estimate of the crop relatively healthy, remains to be seen the damage that's been done in the north/northwestern part of the Corn Belt as well as the southern states, southern, the lower Midwest and the delta. Early harvest results I'm abreast of in parts of southern Illinois, parts of Missouri and Indiana, Mark, while they are beneath expectations, they're still relatively good. So, I think as we visit tonight there is plenty of corn to satisfy the pipe. Nearby basis this week both sift values and interior values were weaker which would suggest there is grain filling the pipe and taking care of that demand. So, I would like to be a little bit defensive as regards to the corn market at least for the next few weeks as we better ascertain the size of this crop and the demand that we're forecasting. There may be some revisions, Mark, in the demand factors particularly as it alludes to interior usage and ethanol in specific.

Pearson: Alright, so if we do revise that demand structure and we do hit this 13 billion bushel number, Virgil, will we see this cash market continue to be under pressure through harvest?

Robinson: I think in some local geographies we will, Mark, given the carryover of beans, corn and the size of the crop in select locales, I do believe there will be a basis issue, a storage issue and that is certainly geographical in nature. But I think our viewers will have a pretty good sense of where I'm talking about and those regions that I'm talking about. There would be some basis adjustments made in the very near future and most likely, Mark, they'll be weaker values. Crop conditions will be released Monday afternoon. We'll all anxiously await that. Last week, surprisingly, the aggregate of good and excellent increased two percent. I wouldn't be surprised to see it unchanged, maybe even a little bit better than that this coming Monday. A couple areas I'm watching pretty carefully, Mark, Kentucky, Tennessee and North Carolina where crop conditions have been quite poor, those are all areas where grain has moved to the southeast to satisfy hog and poultry demand. My guess is that geographically in those locations the basis will be unusually firm this year and carrying charges probably pretty skinny. So, be advised of that if you're carrying hedge to arrive contracts and utilizing storage to isolate grain. Your best opportunities may come earlier than you originally had thought they would.

Pearson: When you talk about USDA revising consumption numbers, particularly ethanol, feed, would you think they'll be revising consumption downward or upward?

Robinson: Mark, that's my guess based on some of the work that I track and keep. I think there could be some modest adjustments downward in those categories. Now, again, it's just my opinion but I'm on alert to that here over the course of the next couple of reports. I wouldn't be surprised, Mark, in the ultimate analysis that corn acres might even exceed what the USDA is currently projecting. I think there could even be more corn acres than 93 million.

Pearson: Wow, alright. What about in soybeans, Virgil, flip side in terms of acreage? What do you see ahead for soybean prices? Again, some recovery this week. There's still plenty of beans out there.

Robinson: Old crop supplies is adequate, Mark, it's the concern that stretches before us here in terms of acreage and the yield is a moving target. We'll have crop condition reports on Monday afternoon, Mark. We did see Pro Farmer at or around 42 so they're still talking in the ballpark of trend, others would argue that's too aggressive. We'll see, I'm not sure what to say there, Mark. I was really taken back by last month, the month of July's price behavior in soybeans and soybean oil was not bullish but bearish, Mark, and that put me on alert that the market is yet sensitive to developments regarding the size of this crop and disappearance. I'm not yet convinced we've seen our seasonal lows in soybeans. What would concern me would be a monthly settlement in the futures market based on the spot futures contract which is September. A close the end of August below $8.34 in my opinion is bearish and would suggest we're headed down into the mid $7 area. So, that is something I'm watching very closely this up and coming week. A close above $8.50 then I would buy into the argument we've perhaps seen our lows for the season.

Pearson: Alright, so some pretty good numbers there for producers to keep an eye on as September comes to a close. Virgil, I think you made the argument for many _______ that soybean prices need to go higher to stimulate that production down in South America.

Robinson: Or, Mark, other adjustments need to be made like currency and exchange and there's been some noise in the Brazilian real, up until this week it had virtually collapsed while the dollar had strengthened. So, that was realigning itself and perhaps there are a couple of trends beginning to emerge there. Not sure, Mark, very premature for me to suggest the Brazilian real has topped and the U.S. dollar has bottomed. I don't think the U.S. dollar has bottomed yet. So, that could be an adjustment, Mark. But my opinion is given the price of soybean futures here in the U.S., $8 or thereabouts, I think that will stimulate some additional acreage in the southern hemisphere. To what extent remains to be seen but there will be an effort made to grow a big crop of soybeans this coming year down there.

Pearson: Alright, Virgil, you've just nailed this cotton market all year. What are your thoughts now as we move into cotton? You've done really well.

Robinson. Well, thank you.

Pearson: I'm wearing cotton clothing tonight, in fact, I won't say what clothes but yeah. As you look ahead now on cotton, again, China is the big question mark as you always point out, what do you see?

Robinson: Well, U.S. mill use has been better than we thought it was going to be, Mark, and this year U.S. ending stocks are projected to decline year over year by about 45% down to about 5.8 million bales. Stocks to use ratio of about 27%. If I used that criteria only and that was my only criteria for modeling price I would suggest that cash cotton prices will average somewhere in the low 60's, Mark. So, given that I would use that opportunity, anything in the $62 to $65 area cash I'd sell cotton and then shortly thereafter just to guard against what could be some kind of weather disaster or some kind of macro development that we're not aware of put on some type of little bull call spread or option strategy to replace those sales. But I do think we'll have opportunities in the low 60's.

Pearson: Alright, a chance to make some sales. Let's talk livestock and what you see ahead there, Virgil. Let's talk about the fed cattle market first. And as you look at this market expansion seems to be or from what we're hearing anyway non-existent, maybe one percent, demand fairly good. Somebody told me this last week that with this cheaper corn we're starting to add some weight. That's a concern. What do you see, Virg, this next quarter?

Robinson: Well, Mark, a lot of points there to address. But the combined size of the cattle herd in the U.S. and Canada actually declined year over year modestly so supply at least is addressed by that, we've addressed. Demand, as long as consumer disposable incomes remain at or near current levels in the U.S., I think per capita beef consumption will continue to grow. Mark, I think numbers tell us of late we've had five, four or five consecutive monthly cattle on feed reports where placements have been much below previous year and three or four, excuse me, three or five year averages. So, the numbers game appears to be in pretty good shape. Demand appears to be in pretty good shape. Mark, total red meat production Jan. through July is up about two percent while prices have sustained pretty high levels. So, I think the demand part of this market is very good. Live cattle prices the balance of '07 into the first quarter of '08 I think the low to mid 90's are likely to be our cash values.

Pearson: Alright, and pretty strong there. Calf market as we head into the fall of 2007 what are you seeing ahead on the feeder market?

Robinson: Well, feeder cattle futures, Mark, are pressing $120 which is the highest they've ever been in the history of futures contracts. Pretty stupid for me to say the trend of the feeder cattle market is down. I don't think it is. I think the demand remains strong. But as we push towards that $120 mark I can't help but believe some type of floor, some type of option strategy beneath feeder cattle futures to protect against the downside is prudent, Mark.

Pearson: Excellent point, alright Virgil, we've got about thirty seconds. Hog market some big news Friday from Smithfield regarding sales to China. It's been talked about, finally 60 million tons looks like it's heading over there.

Robinson: Yeah, which is not a huge amount, Mark, but it's a good precedent and I think there will be additional sales in the future. Exports have flagged of late as Mexico and other of our regular customers have bought less. So, this was important. I think there's plenty of pork available to the market. Big slaughter this week, a couple of million head, Mark, likely to continue in the foreseeable future. I think cash hog values the balance of this year into the first half of '08 probably the mid 40's, perhaps the upper 40's is likely to keep us in check.

Pearson: Same thing, question, on expansion, Virgil. Are we seeing expansion of the hog herd now?

Robinson: Well, U.S. and Canadian herd is up about 1% year over year. I would not suggest that is huge expansion, Mark.

Pearson: Alright, as usual, Virgil, some excellent points, we appreciate it. Thank you, sir, very much. And, of course, that is going to wrap up this edition of Market to Market. Now, if you'd like more information from Virgil on where these markets may be headed visit the market plus page at our website where you'll now find streaming video of our program. By the way, you can download audio podcasts of our market analysis and our market plus segments absolutely free at our website too. So, be sure to check that out. And, of course, be sure to join us again next week when we'll examine a Wisconsin utilities efforts to convert waste into watts. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Market to Market is a production of Iowa Public Television which is solely responsible for its content. Funding for Market to Market is provided by Pioneer Hybrid because sound information plus consistent yields can help farmers stay on track. The people who bring you Pioneer brand corn hybrids proudly support Market to Market.

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