Robinson: Thanks, Mark, nice to be with you.
Pearson: Well, good to have you with us. Virgil, let's talk about this wheat market. We just mentioned a big up week this week in wheat. Obviously we knew last spring that we had big problems down in the panhandle of Texas and through Oklahoma and certainly big parts of Kansas with this hard red wheat crop. That problem hasn't gone away and now it's bee exacerbated by problems elsewhere in the world, correct?
Robinson: Exactly right, Mark. Australia has been a topic of debate here in the last couple of weeks and as you mentioned earlier next Thursday the 12th the USDA and WASDE, World Ag Supply and Demand Estimates will be released and Argentina, Australia, Canada, the Ukraine as well as the U.S. will be those focal points of most importance, I think, in that wheat report, Mark. And, again, as has been mentioned many times on your program the common measurement of supply, the stocks to use ratio globally, as tight as it has been in 30 years, tight here in the U.S. as well. So, that has underpinned values and kept wheat markets at a brisk pace here, Mark. I'd like to mention, however, a couple of things. Kansas City wheat futures, that hard red winter wheat contract, Mark, has really struggled the last few months every time it has approached about $5.25. And that appears to me, at least based on my observations of the chart, the technical aspect here, to be an area of substantial resistance. The deferred wheat futures contracts down there are at and above $5. I think they represent a good hedge here, Mark. Now, clearly the dynamics of this market are such that higher wheat values could emerge over the course of the next several months and I'm fully aware of that. But some type of minimum price strategy where you take advantage of that $5 plus mark for hard red winter wheat futures, in my mind, is appealing. At some point you can selectively come back in and buy an option or a vertical bull call spread or something and keep yourself in position should three or four or five months down the road we discover wheat values are worth infinitely more than $5.
Pearson: Okay, so a good strategy for producers out there.
Robinson: Hard red wheat.
Pearson: On hard red. Virgil, what about soft red? Now, it's had a pretty good run here.
Robinson: Yeah, it really has and Chicago wheat futures are at an eleven year high, made new contract highs this very week, Mark. Be pretty, pretty silly of me to suggest the trend of that market is down. It's certainly not, it's up. Now, there will be, in my opinion, very abrupt and very significant periods of weakness in that contract as the speculative community as well as producers who are now looking forward and with the wheat/corn, wheat/soybean spread at a high or a level not seen since 1980 we're going to attract a fair amount of wheat acres here the next couple of years, Mark. So, please be advised those deferred contracts, must like we just discussed, offer I think attractive hedging opportunities. And, again, for those who fear significantly higher prices six months from now a simple option strategy, spending 30 cents in a market that potentially could be worth a dollar or more is a relatively good value in my opinion. The insurance premium I think is reasonable.
Pearson: Alright, let's talk about this corn market. And we're into the teeth of harvest. We have -- everything that we're hearing is by and large for most of the Corn Belt seems to be very positive in terms of yields. USDA report comes out, as you said, next week but right now corn producers staring at a futures market that actually moved up during the harvest season. The cash market I'm sure there's been some weakness there but this market is moving. Isn't this almost a contra-seasonal move in corn?
Robinson: Well, I think it is, Mark, although to this point the pace of the U.S. harvest is behind last year, for example, and the five year average. An interesting market, Mark, and I think again traders are looking beyond the near term and focusing a great deal of their attention on the balance sheets or potential balance sheets of 2007, 2008, both of which have been discussed in detail on your program. I think, Mark, there is the likelihood, however, of some type of harvest decline as the degree of carry in the cash and the futures market in just the last few days has diminished. The return on storage, while still attractive, has in fact deteriorated. I think that is a signal to producers and growers that the market is in need of their product at present and that wasn't the psychology as recently as a few short weeks ago. So, I think producers in those areas where the basis has narrowed while the harvest or soon to be harvest is just about to get into the gut slot I think they should reward those markets with some grain. That ultimately will probably satisfy the short-term pipe, create something of a pull back in the futures market at which point those who have procured little or nothing for six and twelve months beyond this date will have their opportunity. So, I think the market is set here, Mark, for some type of retracement both in the cash and in the futures as we get deeper into the U.S. harvest.
Pearson: Alright, let's talk about the soybeans. We're rolling along on that harvest too now. Again, Virgil, it sounds like there will be fewer soybeans, at least in Brazil, maybe that will get picked up in Argentina. But as we look forward it just seems like there's an awful lot of soybeans out there and yet we're seeing an up move in Chicago this week.
Robinson: And, Mark, I think you've just touched on what the industry has become concerned about and that is the prospect next season of significantly smaller acreage, U.S. acreage in combination with what is projected to be a decline in Brazilian hectares this year, this season of anywhere from five to ten percent. So, simultaneously fewer Brazilian hectares, fewer U.S. acres despite the fact we have a big supply on hand the market has shifted its emphasis and its focus several months forward. And that, I think, is underpinning the market in addition to the fact that processing margins remain attractive although this week I did note, Mark, the board gross processing margin, which is representative, at least in my opinion, of cash processing margins declined pretty significantly which tells me next week one of two things must occur. Either beans are too high in relationship to products because of this big weekly adjustment or vice versa. My guess tonight is that bean futures are probably too high. I would think that $5.75 area basis November futures will provide pretty significant resistance and I anticipate some type of pullback in the futures market the next couple of weeks.
Pearson: Alright, what about the impact of these funds, all this new money coming in, Virgil?
Robinson: Mark, very hard for me to quantify what that might mean short-term wise. But clearly it's been a factor and it has the, in my opinion, the ability of accentuating price behaviors in a very short-term situation. I think that has been the case in some of our markets of late. All I can say is to a producer, to a farmer have some objectives in mind here in those distant futures contracts because behavior from the likes of what we're describing here or talking about can push markets to those levels very, very quickly and if you're preoccupied with harvest or other activities you need to have resting orders above the market to try and capture some of that value, Mark, and those funds have a tendency to accentuate price.
Pearson: Real quick, Virgil, cotton market under some pressure this week.
Robinson: Yeah, it is. But, again, Mark, let's not lose perspective and October 12th perhaps we'll get some new perspective. But at this point in time the department is forecasting a year over year decline in U.S. inventory, the year over year decline in global inventory. That is not bearish in my opinion. I think the market has discounted some near-term disappointing movement in demand too deeply. I anticipate a recovery in cotton futures over the course of the next couple of months.
Pearson: Okay, let's move over to livestock, Virgil. Fed cattle market first up, which again, we go into post Labor Day and there is always a lot of concern by cattlemen about what is going to happen in the final quarter of this year. What does it look like so far this year as we head into the last quarter?
Robinson: Well, there is a lot of beef, Mark, being produced. Beef production is up about six percent year over year. We know from the most recent cattle on feed report that there are a lot of cattle on feed that will be in the system over the course of the next several months in addition to plenty of pork, plenty of pork supply, U.S., Canadian. I think cattle producers from a cash cattle perspective can look forward to something in the mid to upper 80's the balance of this year, maybe the upper 80's perhaps $90 in the spring of 2007 which means futures contracts, Mark, above $90 Dec., Feb., April and June offer, in my opinion, some hedging or at a minimum putting some kind of put strategy together and creating some minimum price and I think those opportunities will develop between now and let's say the Thanksgiving period.
Pearson: Some opportunities in there. What about some opportunities for pork producers, Virgil?
Robinson: Cash hog prices I think, Mark, will remain the mid to upper 40's the balance of this year. Hedging opportunities as defined by the futures market, Dec. hog futures $63 or higher. I'd use that as a hedging opportunity. April hog futures at $66 or higher, I would do the same. There's plenty of pork, Mark, big kill this week, likely to continue to see 2 million head plus kills the balance of the fall. There's plenty of pork. Demand is terrific. Don't let me, don't let me fool anyone on that aspect. But take advantage of $3-$5 rallies in futures, get some hedges on place for the next several months.
Pearson: Very good. Virgil, thank you so much. Some great ideas as usual. That will wrap up this edition of Market to Market. But if you'd like more information from Virg on just where these markets may be headed visit the Market Plus page at our Market to Market Website. And, of course, remember you can download audio podcasts of our market analysis and Market Plus segments free of charge at our Website. So, be sure to join us again next week when we'll head out to the open range to ride on a wild horse roundup. Until then, thanks for watching. I'm Mark Pearson. Have a great week.