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Market Analysis: Nov 17, 2006: Erin Golly and Darin Newsom

posted on November 17, 2006


There's some volatility in the grain market as traders adjust to the post-harvest fundamentals. For the week, nearby wheat futures lost 14 cents. The December corn contract gained more than a nickel.

Soybean prices have trended lower in recent sessions as traders ponder whether the market is top-heavy. For the week, nearby beans lost nine cents. The December meal contract dropped $7.90 per ton.

In the fiber market, the December cotton contract fell by $2.43.

In livestock, the December live cattle contract was up $1.90. Nearby feeders gained $1.87. But the December lean hog contract sank by $3.45.

In the financials, Comex gold dropped $12.50 per ounce. Nearby crude oil prices fell $5.35 a barrel. The Euro lost 18 basis points against the dollar. And the CRB Index plunged nearly 12 points to close at 305.75.

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: Nov 17, 2006: Erin Golly and Darin Newsom Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Erin Golly and Darin Newsom. Welcome back you two.

Golly: Thank you.

Newsom: Thank you, Mark.

Pearson: Let's talk first about the grain markets and since you're an old Kansas boy let's talk wheat first, Darin. What's happening? We've had some big moves in this wheat market this fall season following the problems in Australia. What's ahead now for wheat? Plantings I know have increased dramatically for that red wheat crop this year.

Newsom: Yeah, I mean, what we're looking at is not only here in the U.S. but plans worldwide to see increased wheat acreage. The market is reflecting that. We've seen, in the month of November so far we've seen the market working lower. Nothing unusual, we had an incredible rally starting earlier this summer up through, you know, maybe late September, early October, actually into October, early November. November we normally see the market come down and we normally see it retrace about two-thirds of what it rallies in the late summer, early fall. So, you know, if we look at this and we look at the degree that the market rallied, you know, basically a lot of it was on investments, a lot of investment traders coming into this market. There was some supply and demand help but not in the short-term. I mean, that still remains a relatively bearish situation in the short-term. And we were able to push this market higher. So, now that we've reached our seasonal high and we're starting to work lower we've got a lot of room underneath this market to come down before we start generating some additional buying interest.

Pearson: Alright, is the high in, in wheat?

Newsom: I would say at least for the very short-term. Now, if we look longer term we haven't solved all the problems as far as being short wheat in the world. So, once we get past November and we get back into December and we start to turn this market back higher we could certainly see at least a run from the highs that we posted in late October.

Pearson: Alright, what about this cash wheat index? What is that showing us?

Newsom: Well, what we're seeing is bases have been incredibly weak for quite some time. Again, it was reflecting the fact that the world really hasn't been coming to our door at this point trying to buy wheat. But here over the last few days, the last couple of weeks we've been seeing the basis bids starting to firm up a little bit and as we see in the index it's the national average cash basis. And so we've actually been seeing that firm a little bit as we're starting to see possibly a little bit more demand coming once we get to, as the futures price has been coming down.

Pearson: Alright, let's talk about the corn market. Finished a little bit stronger this week. And there has been some concern that this corn market, which like we just had this big rally, would be looking towards a pull back. Do you think between now and the New Year that the highs are in for corn?

Newsom: Corn as I've told lots of folks this is one of the most bullish structures on the market that I've seen over the last 15, 20 years. We've got, we've got a very strong non-commercial speculative net long futures position and they're in there for the long-term. Also if we look at the long-term supply-demand situation indicated to us by the spreads in the market we go out through the latter half of '06, '07 and on into '07, '08 we've got an incredibly bullish situation. Now, we could pull this market back a little bit. We're trading up at ten year highs right now. It's very hard to generate fresh buying at these levels. You know, we're going to have to find somebody on the investment side wanting to continue to buy into the corn market. I think it will come but we're going to see moves like what we saw at the end of last week, hinted that a little bit at the end of this week. But we're going to see these moves against the trend where we're going to see some profit taking, I hate to use that word, but long liquidation by the investment traders could pull this market back a little bit but remains incredibly volatile and everyone is on pins and needles knowing that we can't have any problems next year. The supply-demand, the tight spreads are indicating that we can't have any problems next year or we're going to really be facing an extremely volatile situation.

Pearson: Alright, and of course let's talk about that for a minute. Let's talk also about what this cash corn market has been doing because obviously we've gone through harvest, typically we see a lot of weakness in basis as cash corn comes to town.

Newsom: The interesting thing about the basis this year is that, you know, it varies from place to place but if we look at the national average basis we're actually stronger than we normally are and we're coming off our third record, our third large crop in a row. You know, we've had incredible production but basis as a whole over the United States is actually running stronger than it has over the last four years. So, it shows an incredible demand. I mean, besides some of these other factors that we look at showing that we're seeing this shift in demand, we're seeing this change in demand creating long-term change in price. On a local basis we're seeing it, at the local level we're seeing it in the basis. We're running a very strong basis, not everywhere, but we're seeing this improvement and this is one good indication that this market may have some staying power.

Pearson: Okay, so what is a producer to do at this stage of the game? We've got a lot of corn that, we've built a lot of storage this year, Darin.

Newsom: We've built a lot of storage this year and, you know, seasonally the basis does continue to improve throughout the course of the marketing year and so it will be interesting to see, you know, we're hanging at these levels despite, as I said, ten year highs in the futures market. So, a very positive, very bullish cash market right now, very hard to say sell. I mean, but if folks are looking at this and they have to generate some cash, you know, this is a nice market to step in and do a little bit of but it still looks like there is some room to run as we go further into the marketing year.

Pearson: Any indications of problems and katy bar the door.

Newsom: Absolutely, and that is what the market is indicating to us.

Pearson: Have we bought enough corn acres?

Newsom: We're not going to, it's impossible to and that is the interesting thing about this market is that we can't generate enough acres to meet demand. And so for the next couple of years it's going to keep everything on pins and needles. The acres just simply aren't there. You know, the CRP acres, they were put in CRP because they're not that productive, we're not going to switch enough bean acres and everything else to meet all of the demand that they're talking about and that is being indicated in the market. So, it's just something that's going to have to work itself out.

Pearson: Alright, soybeans, talk about that one. There's no real fundamental argument for soybeans is there? I mean, I looked at the carryout and everything else, there's beans a plenty.

Newsom: Well, the market itself is indicating, you know, we don't see these wide carries, these narrow carries in the beans like we do in the corn. We're actually seeing wider carries, you know, the Jan. to March, March to May. What this is indicating is that yes, the supply and demand situation does not back the investment led rally. The market rallied, it dipped into the lower 15%, 20% of its historic probabilities over the last five years just as the corn did a year ago and attracted some investment interest. The market ran up into the upper 20% of the historic price probabilities. The difference is, is that we just don't see, you know, the fundamentals haven't backed this thing and so if these traders ever get to a point where they say okay, we've taken the goody out of this market, it has quite a bit of room much like we were talking about in the wheat market, it's got some room to come down now until it starts to generate some fundamental support. Could come, could come later in the marketing year but it's not there right now.

Pearson: How's basis values for soybeans?

Newsom: Basis actually, you know, it started off the marketing year fairly weak but we've actually seen it strengthening a little bit. We've seen good exports week in and week out. So, the very spot basis levels have actually been performing fairly well. It hasn't changed the short-term fundamental picture at all, we've still got plenty of beans to meet demand. But we have seen a relatively steady defirming basis here over the last few weeks.

Pearson: Alright, well, let's move over and talk about livestock, Erin. And let's talk about this fed cattle market. Obviously we've had a big turn around. All of a sudden now we had high cattle prices and cheap feed and now it's gone the other way around. This, for these fed cattle producers who need to get finished cattle sold what is your take? What is going to happen in the next three months?

Golly: Right, well we've got this cattle on feed report that came out today which was friendly for 2007. The marketings were a little bit disappointing but I feel good about the placements that are going to be lower into next year. We are seeing some liquidation of the breeding herd so along with those lower placements I do think sometime in 2007 we have another shot at $1 cattle with all that information. Corn is, of course, a big problem for the cattle producers and it sounds like it's going to continue to be so for the future and for a while. So, we need to keep a close eye on your risk management plans, it's very difficult to do that but keeping in close touch with your sources of your corn and your stocks is very important. And another key thing to keep an eye on and maybe to be purchasing is your hay because it might be the hay just might be bought away this next year.

Pearson: That's a really good point. Of course, hay has not been cheap here lately but, you're right, it could be going higher.

Golly: That's right and it's important that producers if you can see a little bit of insight of what is coming down the road especially with the corn acres that they take advantage of that now.

Pearson: Alright, alright so let's go ahead now and talk about, you talked about 2007, bullish for 2007. Are we expanding this cow herd, Erin? Do you have that feeling or not? I mean, based on what we're seeing these days?

Golly: I don't think any more. I think we were in the process of it but we're definitely seeing a liquidation of the breeding herd now.

Pearson: Alright, let's talk about the feeder cattle. Again, huge pressure, just going to move the opposite of corn and, of course, we've had this big corn rally. Now as you look at cow-calf people out there is there any light at the end of the rainbow as far as their outlook is concerned?

Golly: Well, we finally see some light at the end of the tunnel today in the cattle on feed report with the lower placements. That is one positive thing, the corn market has been very detrimental to the mind set of the feeder cattle in the production. Corn is fundamentally strong, going to continue to be fundamentally strong and on any significant pull back in the futures market commercials and end users and funds are buying it right back up. So, as long as the corn market remains fundamentally strong it's going to be very hard for feeder cattle to make a sustained rally to the up side and the supplies remain tight into the end of this year but that fact alone is not going to be able to sustain it further.

Pearson: Alright, and you said producers should be taking into buying hay. Also, would you cover feed needs at these prices or do you want to wait for a break?

Golly: Cash wise you should be buying as much cash corn as you can into the future. Future wise, you know, wait for a set back and then look at putting position on the board.

Pearson: Alright, what is your target on feeder cattle?

Golly: I am not going to say what my target is on feeder cattle because it is too hard to guess what it's going to be with these corn prices. It could be a wide range between $20 and $25 depending where corn is going to be. I have a real hard time figuring out where it's going to be in these uncertain times.

Pearson: Alright, I like your $1 fats though, I like that a lot. Now, tell me about this, this hog market, really sustained itself pretty well. This hog market has hung in there pretty well and it needs to because same issues there with feed costs.

Golly: That's right and there's another issue coming up, circle viruses are starting to resurface and if that becomes a national problem like it was again last year we could see some real high prices in the hog market in the late summer or late spring, early summer next year, some real surprisingly high prices due to production problems. Feed costs are, of course, a problem, a lot of producers do not have their feed needs met, do not have any risk management in place. But the hog industry has a very unique opportunity right now. You can still feed $3.50 corn to your hogs and lock in profitability because these deferred futures did rally along with this corn market so there is still profitability to be captured in the hog market which is really odd with the high input costs that we now have to deal with.

Pearson: Alright, so obviously with this feed situation now in the hog market do you think we're going to be holding back some sows? Do you think we're going to see increased production?

Golly: I think it's going to hold off on expansion for right now, I don't think we're going to see any decrease in the hog herd right now, not for right now. Like Darin and I were talking before the show if we can not get enough corn for the hogs that you do have on feed definitely you will see a reduction. But for right now we're coming into three years of profitability in the hog market. We've got deep pockets that we can deal with at these high corn prices.

Pearson: Alright, Erin thank you very much. Darin, thank you. That is going to wrap up this edition of Market to Market. But hey, if you'd like more information from our experts on where these markets may be headed why not visit the Market Plus page, it's at our Market to Market Website. And remember you can download audio podcasts of our market analysis and Market Plus segments absolutely free at our Website. Now, be sure to join us again next week when we'll examine a new twist on rural development that is bringing Dutch dairy farmers to the Midwest. Until then, I'm Mark Pearson. Thanks for watching and have a great week.


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