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Market Analysis: Feb 02, 2007: Erin Golly and Darin Newsom

posted on February 2, 2007


The coarse grain markets remained choppy this week with little new to stimulate a move outside of recent trading ranges.

For the week, March wheat lost two cents, while the nearby corn contract gained more than three cents.

The soybean market rallied this week as analysts continue to predict a significant shift in U.S. acreage. For the week, nearby beans gained more than 37 cents. The March meal contract gained 6.90 per ton.

In the fiber market, March cotton trended lower, posting a decline of 23 cents.

In livestock, the February live cattle contract was up 83 cents. Nearby feeders gained $1.52. And the February lean hog contract gained $1.48.

In the financials, Comex gold lost $1.50 per ounce. Nearby crude oil prices gained $3.60 per barrel. The Euro lost 53 basis points against the dollar. And the CRB Index gained five-and-a-half points to close at 300 even. Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back.

Market Analysis: Feb 02, 2007: Erin Golly and Darin Newsom Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Darin Newsom. Erin, Darin, welcome back.

Both: Thank you. Thanks, Mark.

Pearson: Good to see you. Let's start off with the wheat market, our Kansas native Mr. Newsom, what are you seeing ahead here for the wheat market? Obviously we've had the big run up but there seems to be plenty of wheat getting planted around the world.

Newsom: There certainly is and, you know, one thing about the wheat this is the time of year when we normally start to get our spring rally because of the fact that we've got such bearish underlying fundamentals, you know, what they're looking at in the market, more acres, slowing demand, slowish demand.

Pearson: I like slowering.

Newsom: Slowering, that's a great word, we've had nice snows throughout the southern plains, there's just really been no reason to start drawing some money into this market, buying interest in this market and it's just been floundering around here for quite a while. It's just continuing to slide lower especially when you start to compare it to some of these other markets it just has had a hard time getting any enthusiasm in this market at all. This could continue for a little while, you know, again we are into that time of year where something could spark this thing and we could start to go up a little. But it's just had a very tough time generating any type of interest at all.

Pearson: It sounds like it's selling time in wheat.

Newsom: It would be very difficult to sell right now. Again, looking at -- we normally go up but we have stabilized at least down at the low level so if something were to come into the market, if we were to start to see some of this world demand that we were talking about six months ago we could start to push this market a little higher for whatever reason. You just look at the spreads in this market, it just doesn't look like it's going to happen any time soon.

Pearson: What are your sales targets? Let's talk about hard red first.

Newsom: If we could put 15, 20 cents back on this market I think we'd certainly be willing to pull the trigger on something. Now, that having been said producers should probably, you know, on that first run up have some of that locked in already. But if we can get this market to move 15, 20 cents higher, you know, kind of shake off the doldrums that the moisture has created over the winter see if we don't get some type of freeze or frost scare, you know, it's awfully early for trying to kill the wheat off. Get something like that, get a little bit of rally and start to make some sales again.

Pearson: Alright, same thing on the soft wheat out of Chicago?

Newsom: Soft wheat in Chicago it's actually got a little bit worse supply-demand situation. We look at full commercial carry we're running 100% plus. That market just continues to suffer from lack of demand but if we can get any type of like a residual bounce off of the beans or corn or whatever interest we could generate certainly look at making some sales there as well.

Pearson: Alright, let's talk about the corn market. That's all anyone seems to talk about. You go to an airport people are talking about the corn market. You go out to a meeting everybody's talking corn. You go down to Phoenix, Arizona, non-traditional corn growing areas people are asking me about the corn market. It kind of worries me a little bit. It seems like everybody is in.

Newsom: That is worrisome and you're right, it doesn't matter what meeting you go to. I was in an airport here just yesterday and CNN, ethanol and corn, it's just amazing the amount of coverage, the appeal that this topic has right now. The corn market itself is very interesting in the fact that it seems to have lost some momentum. Could it be from acres? Could it be from this? Could it be from that? Could be from a number of different things but the short-term fundamentals in this market have actually turned quite bearish. the market seems to have enough supply right now to meet demand. So, what we've seen is this market has had this huge run up, like over $4 in the nearby futures and deferred futures as well and then we've backed off a little bit. And what's interesting to me is over the last two to three weeks there is so much made about the index funds and the size of their position. Basically they've been selling over the last two to three weeks and so while everyone else is starting to jump into this market they may actually be starting this process of reallocating into a less expensive or more undervalued market and we've seen some of those start to move as well. So, interesting dynamics at play right now, the market itself hasn't changed, trends still sharply higher, it just the structure of the market is starting to look a little different than it has in weeks past.

Pearson: It's getting some hair on it as grandpa would say. Tell me about this, Darin, as you look at the corn market -- you're talking about some of the fundamentals turning a little bit bearish -- obviously until we drop that planter in the ground we don't know really how many acres are going to get shifted.

Newsom: And that's a great point and even this report that's coming out at the end of March, that's not going -- that's just the beginning because you're right it's not until we actually get going, it's not until we actually get planting that we'll actually know. Sometimes there is a huge difference between prospective plantings which is all it is and final plantings is what we'll know in June. So, we've got a long way to go. This is just the beginning of the planting season and right now we don't even have that. All we have out there right now is the guesses as to what this is going to say. So, there's a lot of questions out there right now and it's the same sort of thing that was driving the crude oil market in 2006, a lot of conjecture, a lot of what ifs and a lot of maybes until that market outdistanced its fundamentals and had to step back. I hate to think of the corn in that same situation but it certainly is building that way.

Pearson: Darin, I'm almost 50, $4 corn is something I haven't had a chance to see very much of. Should we be selling this thing now? Selling some?

Darin: I can't sit across from anyone and tell them not to sell at these levels because it's just fantastic prices. Could it get better? Absolutely, but we raise these crops for cash, for income so if some cash is needed by all means liquidate some here and there. Keep in mind the trend is up, don't want to get sideways with that, the long-term traders are still bullish, stay in step with them but absolutely sell a little bit along the way.

Pearson: Alright, let's talk about soybeans. Again, the defensive commodity right now keeping price up, trying to get soybeans planted. You and I talked earlier in the week and, again, you talk about bearish fundamentals. What are the fundamentals for soybeans?

Newsom: Fundamentals are horrible for soybeans. I mean, if we look at the March-May and the May-July spread both of them are running right around 80-90% full commercial carry indicating the commercial side of the market just is not interested in pushing for these beans right now. What we're seeing is the continued speculative investment, non-commercial side, very interested in this market. Now, we just talked about possibly some money coming out of corn into others. Soybeans seems to be a perfect fit. Seasonally this is the time of year it runs up. you know, you throw in the fact that we've got some acreage question, no one knows what the acreage is going to be right now. You've got that question looming. Possible hot, dry weather in Argentina, possibly moving up into Brazil, just all of these things coming into effect but it hasn't changed the overall picture but it certainly makes a more interesting investment environment for these traders coming into the market. And, you know, we saw a very solid technical week this week, triggering some more buy orders as we head into next week.

Pearson: Alright, and so, again, the same question -- we've got $7.20 or so nearby beans. Again, Darin, you've got to remember my world view is I haven't seen too many chances to sell beans at these prices. And you're talking about really kind of a speculative situation here. Should we be selling beans?

Newsom: We are -- when you see this big a divergence from the non-commercial and the commercial side of the market, I mean, you almost have to award this type of market with some sales. But we want to pay attention to what the market is telling us. They don't want the beans right now, they want them in May, they want them in July. So, we look at those futures prices. If we can sell some cash against those futures, against the May, against the July for later delivery when they do want some beans by all means we need to generate the cash in this market, allow it to continue to run up but don't let it get away from us. If we see this break like what we saw in crude oil when all the talk was $90 to $100, broke back to $50, back to where the commercial buying came into the play. Same thing could happen in corn, same thing could happen in beans so we need to reward these rallies as it goes.

Pearson: Absolutely. Alright, let's switch over to the other side of this equation which is the livestock side. Erin Golly, let's talk first about the fed cattle market which really has hung in there. It's hung in there pretty good and you look further down the road it looks okay, not great, but what you're finding there is this margin issue.

Golly: That is a huge problem for producers right now and funds continue to dominate their presence in the pits in the cattle right now. Especially today we saw triple digit gains in the cattle today. Without any cash news, you know, some people are asserting that to we have a full moon and that's why cattle rally in the full moon.

Pearson: I was hoping Punxatawny Phil was going to help us out.

Golly: Maybe we can contribute it to that as well but then also a lot of the big producers are down at the National Cattleman's Association meeting down in Tennessee so there wasn't a lot of sellers in the market to take on the funds. So, overall I think things look positive. I think if the corn prices continue to rally I think we're going to see less placements in the feedlots and I look for the deferred futures in the fall and the winter to possibly go up and touch that dollar market. I mean, we've got April right now sitting at 96 so it actually might come a lot sooner than most people think. But I feel real positive about the cattle market.

Pearson: Alright, so what we really have to do is as we run up these corn prices, cheap corn makes for cheap cattle, cheap hogs, higher priced corn, higher priced cattle and hogs. hopefully we're going to see that. Do you see any herd growth this year?

Golly: Not seeing any at all and actually seeing some further liquidation as well.

Pearson: Alright, let's talk about the feeder cattle market. Obviously that's who's going to get dumped first when you get an environment like this are the cow-calf ranchers out there. What words do you have for them right now looking at this feeder cattle market? We've bounced back up, we've come back a little bit.

Golly: Right, well with the cow-calf guys there was just a report that came out -- I don't know if it was last week or the prior week before -- that the hay stored on farms is at the lowest level in 20 years. And hay prices are already through the roof already. So, it's so important that producers get whatever hay they can get their hands on and get that taken care of because I do think the hay is going to be a precious commodity this year and there's a lot of talk about hay acres getting switched over to corn and such so it's important to get that locked up. But price wise I think we're going to trade sideways for a while here until we get a better direction from the corn market. I think between 85 and 95 is probably what's we're going to continue to trade. Dollar will probably be our top for right now but we need to get some more leadership from the grains at the end of the March report then maybe we'll have some better ideas of where we're going.

Pearson: Alright, what advice do you have for people covering feed needs, corn and beans?

Golly: Buy as much cash corn as you can, get your hands on it and be purchasing put options underneath of them just in case something would happen that we get a record amount of acreage switched over that you have a protection on the bottom side of that corn, that you're not losing money at feeding four dollar corn but it's important to get that cash corn boughten.

Pearson: Alright, let's talk about the hog business. And, again, in the old days when I was growing up people would be jumping in and out of the hog market where they could make a buck. That's yesterday's news. Now we've got these vertically integrated swine enterprises. What do you see happening for hogs? What do you see happening for that whole sector in terms of liquidation?

Golly: Sure, we're not seeing any liquidation yet but I think the high corn prices have curtailed in future planning expansions that we were talking about in the industry that we're going to see. Corn, of course, is a definite factor for the market right now. We're having -- I'm seeing some pricing issues that were, of course, dealing with the ethanol plants and such but I think the most important thing I could recommend to producers is that they be contacting their grain mills and their feed merchandisers and inquiring about corn for contract because I'm starting to hear some shortages of corn for delivery this summer. So, it's important that you be doing that. One other thing that's going around the industry is that we might have to become a net importer of corn because ethanol is going to be demanding much of it for its usage but I don't think a lot of people realize the importance of saying importing corn actually costs are so high because right now as long as we export corn we are going to hurt the livestock.

Pearson: We're out of time. Thank you so much. Gosh, I hate to stop her. Erin Golly, Darin Newsom, thank you both. That will wrap up this edition of Market to Market. But if you'd like more information from our two analysts, and obviously they've got more to say, on where these markets may be headed visit the Market Plus page at our Market to Market Website. Of course, remember you can download audio podcasts of our market analysis and market plus segments free at our Website. Now, be sure to join us again next week when we'll examine efforts to replace fossil fuels with switchgrass at a coal fired power plant. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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