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Market Analysis: Jun 15, 2007: Virgil Robinson, Pioneer Hi-Bred International

posted on June 15, 2007

USDA released its latest supply and demand estimates this week, cutting domestic and global wheat ending stocks sharply and igniting a big rally in the wheat pits.

For the week, July wheat gained nearly 80 cents, while the nearby corn contract gained 37 cents.

The government's supply and demand report didn't contain anything new for soybeans, but the trade followed the rally in wheat. For the week, the nearby contract moved more than 25 cents higher. The July meal contract gained $9.20.

In the fiber market, cotton trended higher again this week with the December contract posting a gain of $2.53.

In livestock, the June live cattle contract was up 83 cents. Nearby feeders were off $1.25. And the July lean hog gained nearly 2.00.

In the financials, Comex gold gained $9.00 per ounce. Nearby crude oil prices gained $3.24 per barrel. The Euro gained 13 basis points against the dollar. And the CRB Index gained nearly four points to close at 318-even. .

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

Market Analysis: Jun 15, 2007: Virgil Robinson, Pioneer Hi-Bred International Pearson: Here now to lend us his insight on these and other trends is one of our long-time market analysts, 31 years, Virgil Robinson. Virg, good to have you in your 31st year on the show.

Robinson: Thank you, Mark. Nice to be here. Happy Father's Day.

Pearson: And right back at you.

Robinson: Thank you.

Pearson: Alright, and this is the time when we let the bulls out. But the people weren't talking so much about livestock as they were about this wheat market this week, Virgil. What a wild run this has been, up over $6 in Chicago, similar response in the hard red Kansas City market and elsewhere. Obviously the wheat numbers worldwide, you've been talking about this for some time, are very tight.

Robinson: They are, Mark. One of the measurements, stocks to use ratio, about 15% which is the smallest or tightest in the last 30 years. In addition to that weather is clearly a factor here as it is too wet and concerning in parts of Oklahoma, parts of Kansas, even parts of Nebraska as the harvest begins, the hard red winter wheat harvest begins to move north. Concerns on the other end of the spectrum in the southeast and parts of the eastern producing areas too dry, Mark, so we have weather concerns, global weather concerns in Ukraine, in Russia and eastern Australia and China and some total of that was, as you mentioned a few moments ago, a virtual explosion in price this week in Chicago, Kansas City and Minneapolis wheat futures.

Pearson: The reports that we're getting in terms of wheat that is remaining good, western Kansas still seems to be a good spot but you mentioned the panhandle of Oklahoma and Texas that were so dry last year and now are getting hit by being too wet. So, for producers out there right now, obviously a rally like this, do we want to be making some sales?

Robinson: You know, Mark, I've had some calls recently from producers in the areas of distress in the hard red areas that are concerned they'll not have enough wheat to make good on their forward cash contracts and that is concerning to me and that too may have been part of this week's mix in the futures markets. But that aside for a moment, yes, I would sell hard red winter wheat, I would sell spring wheat at these price levels assuming you have the crop either in hand or are assured of that crop. And at some point, Mark, in the next 30 to 60 days replace it with some type of option strategy and then check out how things develop over the course of the next several weeks. Your guest last week mentioned $6, the next target for those technicians in the audience would be, you know, a few short years ago when wheat probed the $7 area briefly. I'm not forecasting that, I'm just bringing that to their attention.

Pearson: Virgil, as we look at wheat and, of course, we were counting on a big wheat crop in the United States this year and, of course, wheat can also become a feed crop as well, at $6 that doesn't work too well. What is your strategy now going forward? We've got this entire commodity complex is up sharply this week so wheat you'd make some sales but what about the corn market? What does all this pretend for feed grains?

Robinson: Mark, I looked back at the last time we visited which was St. Patrick's Day and we talked in length about strategy and I think bottom line was we did not want to finalize the price, any of our new crop production which, to this point, has proven to be okay. So, for those who followed that advice or thought in those terms and in fact have created price floors by buying put options or selling their cash product and buying call options or some version thereof I would roll those floors up and I would take advantage of the market here and capture some of that value yet leave the opportunity here as the growing season moves forward with greater and greater concern almost on a daily basis the opportunity for higher price is yet in place.

Pearson: Still strong demand from ethanol, still good feed demand, decent export demand for corn, is that right?

Robinson: That's correct although corn exports have slowed, Mark, and I wouldn't be surprised in future S&D's to see the USDA acknowledge that by perhaps reducing corn exports perhaps 50 to 100 million bushel. But your point about ethanol demand capacities continue to grow. There is still profitability in the industry, not like it was a couple of years ago, but certainly yet return on investment and as long as that is the case and demand remains relatively strong for ethanol those capacities and demand is going to continue to grow.

Pearson: I go out and talk to groups and I know you do this too and the areas where this program is aired which is a fairly wide area around the country for that reason we don't talk about cash basis values, we don't really talk that much about the cash markets. You have alluded to it in the past about certainly tracking your cash basis, that's really critical now with the ethanol demand isn't it?

Robinson: It is and it's unique, Mark, as mentioned in the 8-week period in our conversation here not only has the futures market moved significantly higher, the corn basis has strengthened as well. In my career it's very rare and unique when you see the two in combination which underpins and underscores the demand for this particular product. However, we do have a crop growing and at some geographies it's promising and there will be some storage issues, I think, so those who have old crop corn and are looking for their opportunity tonight based at least on the cash index price $4 is prevalent almost everywhere. This is certainly a nice opportunity for those who need space and are thinking now about cleaning and getting space in order for the up and coming crop. This is sure a nice opportunity for them to make that sale. If they choose to participate in the weather uncertainty that yet lies ahead and option strategy, simple, more complex, whatever you choose is certainly available, Mark, for anywhere from 20 to 40 cents.

Pearson: With a record amount of corn potentially coming in this fall could we see a basis, sharp basis deterioration when this crop comes in?

Robinson: I think we'll see some, Mark. I don't know how sharp it will be. It might be geographically unique to the areas that have adequate storage and those that do not. Those that do not there will be some deterioration.

Pearson: Let's talk about soybeans, a 25 cent rally there, again, for really no discernable reason except defensive, right?

Robinson: Well, the soybean market is unique, Mark, in that the demand for product oil, this biodiesel evolution developing across the globe and to some extent here in the U.S. as well as protein demand just continue to track higher year over year over year. The department is projecting that total oil seed production this year will be about 399 million metric tons which is about 5.5 less than last year and it would mark for the first time since '95-'96 a year over year decline in that commodity in oil seeds, Mark. So, it underscores the concern that is growing not with product in hand but yet what could develop in '08 and '09 where acreage here in the U.S. as well as in the southern hemisphere is still up for grabs so to speak. So, that I think is the fuel along with this strong, strong global demand keeping the soybean market as buoyant as it has been.

Pearson: Alright, Virgil, so with that in mind would you be cleaning out old crop with this rally? What would you be doing?

Robinson: Yeah, I would, Mark, and I'd certainly keep that floor strategy, that minimum price strategy in place on the new. I can't unequivocally tell our viewers that bean prices can not and will not go higher because certainly they can but a couple of things of caution, at least in my perspective, is the fact that as we track the behavior of commodity funds as we visit tonight, Mark, they have a record net long position. And to this point they have been correct. But should their perception of the market change for whatever reasons, an exchange rate, a change, a weather change of significance, an increase in acreage combined with improved weather the soybean market would be very vulnerable to a very swift and abrupt change in direction. So, please be advised of that.

Pearson: Real quick, cotton market, again, a big rally this week. What is your take there?

Robinson: Mark, U.S. cotton inventories projected to decline 3 million bales year over year, global down 5 million bales, Mark. That has underpinned the market, it's recovered. I would like to sell old crop cotton and I sold old crop cotton several months ago and replaced it with some options, Mark, but for those who have it as the July or October contract approaches 57 to 58 cents use that as your trigger mechanism, sell the old. New crop I think is going to consolidate here but eventually trade toward $61 or higher, put your puts in place at that point.

Pearson: Alright, let's talk livestock, Virgil. Feeder cattle market was under pressure this week, fed cattle market on the board was higher. As we go through this summer month what are you anticipating for the fed cattle market? We've been under some pressure here for the last few weeks.

Robinson: Yeah we have, the beef disappearance remains pretty good, Mark. I saw the USDA's export numbers Jan. through April, beef exports are up about 19%. There is plenty of product, however, at hand. I think the highs in the cash cattle market have been made. I do anticipate a little recovery here in the near term. I think third quarter live cattle prices will average something near 90, fourth quarter probably a couple of dollars below that. October live cattle futures around 97 cents, I'd use that as my hedging vehicle. December around 96, I'd do the same.

Pearson: Let's talk about the hog market, Virgil, and what you see happening as far as the hog market is concerned. You know, very little expansion according to that last USDA report. What do you see ahead here? Prices have had a nice rally.

Robinson: They have, Mark, I think there will be some additional strength here near term wise even though pork production and the number of hogs that we have slaughtered to date are about two percent higher respectively. I did notice one other caveat here, Jan. through April hog, excuse me, pork exports have declined, Mark, not significantly but declined. So, we have analysts and experts becoming more concerned about breaking that string of 15 years of consecutively higher exports year over year. Having said that, Mark, I think third quarter live hog prices will average in the low 50's and that is probably going to be as good as we do through the balance of this calendar year and the first quarter of '08. I would use the October live lean hog futures 71, December 69.

Pearson: Virgil, thank you so much. Virgil Robinson, that will wrap up this edition of Market to Market. But if you'd like more information from Virgil on where these markets just may be headed visit the market plus page at our Website where you'll now find streaming video of our program. And remember you can download audio podcasts of our market analysis and market plus segments free at our Website. And be sure to join us again next week when we'll examine the state of Nebraska's controversial ban on corporate agriculture. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news USDA wheat