Iowa Public Television


Market Analysis: Nov 10, 2006: Virgil Robinson, Pioneer Hi-Bred International

posted on November 10, 2006

With the exception of a slightly smaller-than expected corn yield, the USDA report held no surprises for the markets. At Thursday's close, nearby wheat futures lost more than four cents. The December corn contract jumped nearly eight cents.

Decent export sales offset higher ending stocks and a record crop in soybeans. For the week, nearby beans gained more than eight cents. The December meal contract advanced $2.80 per ton.

In the fiber market, the December cotton contract gained 62 cents to edge back toward the $50 mark.

In livestock, the December live cattle contract was down just three cents. Nearby feeders lost 95 cents. But the December lean hog contract gained 53 cents.

In the financials, Comex gold climbed $8.10 per ounce. Nearby crude oil prices rose two dollars to $61.16 a barrel. The Euro gained 103 basis points against the dollar. And the CRB Index jumped nine points to close at 317.50.

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

Market Analysis: Nov 10, 2006: Virgil Robinson, Pioneer Hi-Bred International Robinson: Thank you, Mark, and happy Veteran's Day to you and our veteran viewers.

Pearson: Thank you very much, we appreciate it. Now, Virgil, let's talk a little bit about -- let's talk first about wheat and then I want to get into this crop report and what you see ahead for the wheat market. Obviously this situation in Australia, certainly the situation we had in a big part of our viewing region, in Kansas, Oklahoma, the panhandle of Texas with hard red wheat, certainly tightened up supplies, helped be a catalyst for this dramatic rally we've had in corn. Wheat producers right now we've seen a little bit of a back off. What are you telling producers?

Robinson: I think to start, Mark, maybe touch briefly on the primary points from today's report. Again, the USDA confirming or reaffirming the fact that ending global wheat stocks are projected at about 119 million metric tons, the smallest since 1981. That pencils to a stocks to use ratio, a global stocks to use ratio of about 16%. So, I think that underpins and underscores at least as we visit tonight the supply situation in wheat. It is at hand tight and not likely to change at least for several months. Now, that is the perception in the market, Mark, is that here in the United States both hard red and soft red winter wheat acreage will increase pretty significantly, the trends, if it yields a trend will increase supplies and supplies will be more than ample one year from now. And I think that is the premise by which the market is working. Tight at hand stocks with the perception of growing U.S. and global stocks in the months to come. So, to answer your question, the $5 mark has been pretty stiff resistance in the soft red, hard red and Minneapolis contracts as well and I hope from times past producers either put some type of floor or put option strategy together or in fact did sell some cash wheat. I still think $5 is a very stiff barrier and one that we should all take advantage of at least with part of our production.

Pearson: Especially on some of that new production going forward some parts of the Corn Belt that have shifted over to wheat and so forth.

Robinson: And, Mark, you know, I'm a proponent, always have been I think since the time you and I have met and first conversed, when you talk about new crop whether it's new crop corn, beans, wheat or whatever I'm always an advocate of a minimum price simply because of the uncertainty of weather, the uncertainty of economics moving forward and I wouldn't discourage anyone from minimum pricing new crop hard red or soft red winter wheat at these levels.

Pearson: Alright, let's move over to the corn market, Virgil. And, again, let's talk about the USDA report, 10.7 billion bushels, seems like a pretty good sized crop but, again, smaller than what we were predicting earlier.

Robinson: Yeah, third largest crop on record should it come to fruition, Mark. But, again, when you're projecting disappearance for the year approaching 12 billion bushel you quickly note a year over year decline in inventories and that is the theme of today's report as well. Mark, kind of interesting, should note net export sales which were reported this morning, one of the largest in my memory and I think statistically might be the 15th largest on record. So, to suggest that price over the course of the last several weeks as it has moved higher has discouraged consumption or new business at least in this instance would not be accurate. Now, I do see some rationing I think and some demand lows taking shape in the broiler and layer industries where in each of the last several weeks numbers of birds that have been set, Mark, have declined. So, perhaps taking a toll there but in the other two species, primary species cattle and hogs I do not see that at present given the current price structure we're at. Demand remains strong, export wise and domestically.

Pearson: Virgil, these strong basis values tend to suggest that there is not as much selling, farmer selling occurring as what we'd normally see for harvest time period. Is that the case or are we just looking at that much demand out there in these cash markets?

Robinson: Oh, I think a combination of the two, Mark, but your point is a good one. I think there has been an increase, pretty significant increase in storage year over year and with the incentive that the 2007 futures contracts and our interpretation of prevailing fundamentals, that being strong demand domestically led by ethanol production as well as livestock production and a pretty healthy export pace, Mark, there has been I think little incentive for those that possess storage to release that inventory. Turn of the year with cash flow needs perhaps increasing in tax ramifications being a factor that may change but at present market pretty solidly underpinned and likely to remain as so for the next several weeks.

Pearson: With the snapshot we had this morning on this corn market, Virgil, do you think with the market's move, the strength we've had, have we bought enough corn acres to cover our corn needs in '07?

Robinson: I don't think we have at present, Mark. That is a great, great question. I wish I had an answer for you but there are economists of great reputation that are of the opinion we need to increase corn acreage by as many as eight to ten million acres year over year. That is a very formidable charge, Mark, and I'm not convinced that $3.50 corn will in fact accomplish that. So, that underpins those new crop futures contracts and will do so for the foreseeable future.

Pearson: Alright, let's talk soybeans. Again, we talk about buying corn acres typically from soybeans, the soybean market has had a good rally too in the face of a record soybean crop, record on farm yields and, of course, South American production all happening at a time that these prices are going up and yet there's plenty of beans out there for 2006.

Robinson: Yeah, at face value today's numbers were again bearish, Mark, as you eluded to a record U.S. crop with a projected record carry over, oil seed, world oil seed production is projected at a record including within that the projection of Brazilian and Argentine production at or near record levels. So, at face value there really isn't anything supply wise at hand that is particularly bullish. The factor here, Mark, the X factor is how many acres do we lose in 2007? With the loss of those acres will they, in fact, in the southern hemisphere increase their sewn hectares and as we've discussed and many people have discussed there are economic issues down there that yet need to be resolved. So, that mystique underpins the soybean market accompanied with pretty dog gone good domestic demand, processing margins at least in my opinion remain profitable and the demand for soybeans is strong in that particular demand pull as well as for export at this point. China is projected to import about 32 million metric tons of beans, Mark, many of which we will supply.

Pearson: Virgil, would you be selling beans here, cash beans?

Robinson: Mark, I sold beans several cents ago and thought and suggested buying some type of call option or strategy to replace that inventory. I missed that opportunity. I'm looking for an opportunity, Mark, to recapture beans that I've already sold. So, to answer your question do I think this is an attractive price given the bean supply scenario we just talked about briefly, yes I do.

Pearson: Alright, let's talk about the cotton market real quick, Virgil. We're getting back up towards $50, you had some pretty good calls on this cotton market early. Are you going to wait now and let this market strengthen a little bit before making more sales?

Robinson: Thank you, Mark, I think you have me mistaken with somebody else.

Pearson: You were up above $50.

Robinson: No, I think that might be true. Cotton inventories in the U.S. are projected about 6 million bales which would be identical to one year ago. Globally cotton ending inventories are projected to decline modestly, I think 3 million bales year over year. There is currently a carry in the New York cotton futures market. The May cotton futures contract has about a $7 carry to the spot contract, Mark. For those who have storage I'd like to make a short hedge, a storage hedge if you will, in the May cotton futures around $58 and attach a basis sometime this spring when they're out planting their cotton at say a dollar under or thereabouts with a net then of about $57 which would be about a $10 increase year over year in U.S. value.

Pearson: Good call. What about fed cattle real quick? Obviously the cattle industry is getting thumped here with this high feed cost. What do you tell somebody who is feeding cattle right now?

Robinson: Well, Mark, it's probably not going to be a pretty picture for the next several months. I think live cattle prices, the first three quarters on average in 2007 will be somewhere in the mid-80's. I think the Feb. live cattle futures contract at $91 is a good hedge, Mark. I think the June cattle futures contract at $87 to $88 is a good hedge and the August at $86 to $87 is also a good hedge. That would net out with a basis attached something above the mid-80's and that is what I'd try and take advantage of.

Pearson: I want to take a quick look at these feeder cattle, Virgil, of course moving just in the exact opposite direction as that corn market does. What do you tell the cow-calf guy here?

Robinson: Mark, watch closely this week, it appears to me there is a bottom taking shape in the futures market, not in the cash but in the futures market. A Friday close, tomorrow close above $1.01, I think feeder cattle futures will move back towards $112 to $115.

Pearson: Virgil, we've got about fifteen seconds for the hog market. What is your take on hogs as we get into this fourth quarter?

Robinson: I think cash hogs will average somewhere in the low 40's the first three quarters of 2007. I would short hedge the, my production in the Feb., June and August futures contracts at prevailing values.

Pearson: Alright, and Virg, feed needs coverage. Would you do any right now or would you just sit tight?

Robinson: Mark, I think there is the chance here for a little pull back in the corn market and soybean meal market, that pull back is an opportunity to procure some feed.

Pearson: Good comments as usual. Virgil Robinson, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Virgil on just where these markets may be headed visit the Market Plus page at our Market to Market Website. And remember you can download audio podcasts of our market analysis and the Market Plus segments absolutely free at our Website. Now, be sure to join us again next week when we'll pay a harvest time visit to Clay Mitchell's place to learn how his precision farming practices faired. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news USDA