While last week's news of tighter supplies and strong demand pushed corn prices to record highs, weather, crop condition and long position selling all contributed to a drop in the nearby contract this week. Coupled with European Union tension over who will pay for Greece's debt, a strengthening dollar and buyers looking for cheaper product the market moved lower.
For the week, July wheat lost nearly 87 cents, while the nearby corn contract moved more than 86 cents lower.
Despite tight supplies, larger private acreage reports, higher South American crop numbers, and exchange rates pushed the July contract lower for a weekly loss of nearly 55 cents. Nearby meal prices followed suit and moved $24.30 lower.
In the softs, cotton fell again for a weekly loss of $9.88 per hundredweight.
In the dairy market, July Class III Milk futures were up 41 cents, and the deferred contract moved 25 cents higher as well.
Over in livestock, cheaper grain pushed prices limit up at one point near the end of the week as the August cattle contract gained $6.73. Nearby feeders rose a little more than $9.00. And the July lean hog contract gained $2.43.
In the currency markets, the Euro lost 76 basis points against the dollar. Crude oil settled Friday with a weekly loss of $6.28 per barrel. Comex Gold climbed $9.90 per ounce. And the Goldman Sachs Commodity Index lost almost 35 points to close at 667-even.
Pearson:Here now to lend us his insight on these and other trends is one of our regular market analysts, Darin Newsom. Darin, welcome back.
Pearson:I've watched that Goldman Sachs index for a long time. I think that's the biggest weekly loss we've seen.
Newsom: Yeah, isn't that quite a trend you've got over to the right hand side there. It's a very telling story for what's going on in commodities right now.
Pearson: There is a feeling out there that I'm sensing from the trade from you and the people that I talk to that they're feeling a lot better about this crop, despite what you just saw with the flooding on the Missouri River, despite the southern downstream flooding in Mississippi, the wet, wet weather and delayed plantings and nonplantings in Ohio, in the Dakotas, in Wisconsin, and parts of Indiana and Illinois, they feel like we're in pretty good shape.
Newsom: There does seem to be that sense to the market. I haven't visited with folks across the country, but if I just look at the market signals, if we look at the way the Dec.-March, and March-May future spreads out in the new-crop contracts, what they're showing us, we're seeing the carry starting to strengthen ever so slightly. This would back up what you're saying, that the market itself is getting this sense that things aren't as bad as what it sounds right now. Now, we've got a long way to go, and we have very little margin of error.
Pearson: This is all crops really.
Newsom: It is. But corn is kind of the king of the crops right now. I mean everyone is focusing their attention on crops. We do have tight soybean supply and demand. Global world wheat supply -- global wheat supply and demand isn't as tight, so we're focusing on the domestic corn. We don't have the margin of error to lose that. And it's not all million acres going to come from corn, but let's say it's 75-80 percent. That is really going to change this outlook going forward throughout the 2011-2012. We may have that sense right now, but once we get to, say, August, maybe early September, that could certainly start to change.
Pearson: It could start to rekindle?
Newsom: I think so. I think you're going to see the commercial side of the market starting to get very concerned again. The longer this problem persists, the more -- let's stay it expands and we're starting to talk about maybe a bit more acreage than what we're talking about right now, and the national average yields for these acres start to come down, get whittled down as well, then that 5.4 percent ending stocks to use that was released in the June USDA Report, that's going to be revised, and most likely it's going to be revised down. The all-time low in corn is 9596 at 5 percent, and we didn't have the type of demand that we're expecting right now. That's another question entirely. But right now it looks like once we get later in the summer, that could start to rekindle this commercial support in the corn market.
Pearson: It looks like the air came out of the whole commodity sector. We had the stronger dollar this week, weaker oil and, obviously, sharply weaker grain and oilseed cotton prices.
Newsom: To me that's the key. It's not any one particular supply and demand issue. It's the fact that commodities as a sector, except for gold, some of the precious metals, commodities as a sector seem to be losing favor with the investment community. The dollar all of a sudden is starting to get some of this support. We're hearing stories from Europe. Certainly Greece is the headline right now. But we've seen some buying coming into the dollar over the last two or three weeks. It looks like we're heading for a summer where the dollar does want to try to go higher. We ran into some resistance on Friday. I think it might be a one-day deal. Get through the weekend, right back at it next week. This is going to continue to keep pressure on the commodities. Those king commodities that we talk about all the time -- corn, crude oil, some of the other subsidiary commodities -- could continue to come down, could continue to be pressured by the dollar.
Pearson: All right. Well, let's go case by case. Look at the wheat market first. You know, globally it looks pretty decent for wheat at this stage of the game -- not that that tells us much -- but won't there be some spillover demand for wheat with the stronger corn price? We've heard cattle feeders. We've talked to a lot of people looking at wheat substitutions already in the poultry business.
Newsom: Yeah, we've been hearing a lot of it over -- the stories I was seeing came out of North Carolina. They were already looking at wheat over corn. And if we look at the DTN National Index, wheat compared to corn -- soft red winter wheat compared to national corn average corn price, you can see that wheat is really undervalued historically compared to corn. Now, will this in a large degree start to pull wheat demand -- increase wheat demand for feed? We haven't seen it yet. We're hearing rumblings. We're hearing the early possibilities of this happening, but we haven't seen it large scale yet. If we continue on through the summer and if we have a decent winter wheat harvest and if the rest of the world is able to grow wheat, then I think that is going to start to weaken the cash market even more in the wheat and that's going to make it that much more attractive and we will start to see some official government numbers possibly edging up the wheat for feed numbers in the monthly reports.
Pearson: All right. Producers growing a wheat crop today, would you make any sales after this pull back? Just want to sit tight and wait for things to rekindle? We're going to be going into harvest. We are into harvest.
Newsom: Yeah, we are. I visited with folks down in Kansas, and the harvest is just blazing through. It's herding through Oklahoma. The dry land wheat is getting done quickly in Kansas. I would be reluctant to sell it at this type of selloff, given the type of selloff that we've seen over the last couple of weeks. But the problem is it may not get any better. Wheat is one of those markets where traders have to see that it's actually not there -- physically not there. They've been burned too many times by wheat that supposedly was dead. I don't think I'd want to sell it down here, but I'm not going to wait long if this dollar does continue to strengthen to start to pull the trigger on some more wheat.
Pearson: All right. Corn sales, same thing? You want to kind of wait for a pull back up here or see what the dollar does?
Newsom: Seasonally the corn tends to put in a high a week ago Friday, so about mid-June. So it looks like we're still in step with our seasonal patterns, and we've got some possible long-term sell signals occurring at the end of June in the corn market as well. So if we want to make some sales, I mean we've got some pretty good prices for the Dec. 2011, '12, and '13 contracts. You can start getting some of those on the books. I wouldn't overload on them because, again, there's so many questions going forward, but I do think you can get some on the books, get some locked in, and then start to build from there as we start to see what's out there.
Pearson: Let's talk about -- and we're still hearing some hot demand for old-crop corn going through August. That cash demand still sits out there. But as we look to 2012, we look at this harvest, what's your strategy going to be to make sales?
Newsom: I'm gonna be pretty -- I think we're going to sit back a little bit. You're absolutely right; we've got some good commercial demand right now. National average basis is very strong, but let's say that we do start to see some cracks in the ethanol demand -- I'm not saying that we're going to, but certainly the bate is getting stronger. Let's say feed demand starts to come down. With the cattle-on-feed report today, that certainly looks like a possibility. If the U.S. Dollar Index goes up, then export demand could start to come down. So this very strong national average basis, and in most cases local basis, can start to back off a little bit as we get deeper into the summer. So I think I would want to go ahead and make some sales here. As I'm looking forward, I would probably want to go into the futures markets, maybe some options because I want to see if that basis -- if you've got a good basis out forward, go ahead and lock everything in. But if it's weakening a little bit, wait, sit back, see if it doesn't tighten up and support the basis again.
Newsom: Soybeans is a tough nut right now. It hasn't really wanted to go anywhere. It's been trending sideways. We finally started to break down this week. The stronger U.S. dollar certainly doesn't help the ample supplies coming out of South America. It's certainly going to be a weight around soybeans' neck. This market seems like it wants to go down. So again, good prices at this point for the November 11, 12, and 13th. I think we can go ahead and get some on the books. Not a lot. Get some on the books because there's still almost as many questions in soybeans as there is in corn. Yes, the global supply and demand situation isn't' as tight in soybeans as it is in feed grains, but it's tight domestically, so I think that's going to keep enough question marks in soybeans to allow the market to rally again later on.
Pearson: China, are they going to be big in the soybean market in 2011-2012, or did they fill their reserve and now they're just going to buy as needed?
Newsom: Yeah, that's a -- that's going to be the question of the day and question of the year. I think they're going to continue to buy, but we have seen them pull back quite a bit. They are buying some South American supplies right now. I think our time will roll around again, and I don't think we're going to see them shut off the pipe line. I think we are going to continue to make sales into China. Now, is it a situation where they were just building up their supplies in 2011? That is a possibility. I'm not going to say it's a real strong possibility right now. I think that might be part of the gamesmanship that we see in the soybean market every once in a while. So I would anticipate as we go forward into 2012 and beyond that we're going to continue to see strong demand coming out of China.
Pearson: Okay. Well, it's going to be a relatively tight scenario. Talk about cotton, the big selloff again this week.
Newsom: Yeah, there's a lot of talk in the cotton market right now about increased acreage, higher acreage than what was anticipated. We've seen a great deal of pressure coming into the new crop December contract. We've seen the inverse between the December and the March 2012 contract really take a hit over the last couple of weeks. I would anticipate cotton to continue to come under pressure. Now, I don't think we're going to relieve the tight supply and demand situation to the point where December moves into a carry situation with March. I just don't see that happening, but I do think we can continue to keep the December contract under pressure until we know more about the crop that's out there.
Pearson: Let's shift gears. I want to talk about livestock. A move up on the futures market this week for fed cattle and for feeders. Obviously, feeders benefiting greatly by the corn price falling apart. But where do you see us going? We seem to be so economically sensitive in the beef business anymore. It was great to see this move this week. Is this the beginning of things to come or is this a spike?
Newsom:I'm leaning toward the fact that this may be a spike at least in the short term. We had the August live cattle contract get grossly oversold, so we're looking at a bit of a technical rally here in the face of things. With all these other markets falling apart, maybe live cattle shouldn't be going off on its own and rallying, or the livestock industry as a whole. So I would anticipate that this would be a short-term technical rally in the live cattle market. Now, as we go forward again, the placement numbers was quite weak for may. I think it came in at something like 89 percent of last year. So long term this could provide support to the deferred live cattle contracts. We could start to see open interest shifting out to the long-term contracts. We could start to see buying coming into those markets. August could see another week or two of rallying. I would say a week to ten days. Then start to come under pressure again because we have passed that big window of opportunity for the -- buying.
Pearson: Friday's cattle-on-feed report, your reaction to that is what?
Newsom: I would say right now it's bullish long term for the cattle market itself. The low placements, the fact that on feed actually came in a bit under what had been anticipated, so I would look for the cattle market to continue its rally heading into next week.
Pearson: All right. Let's talk about hogs. Obviously very export dependent in the hog business. And that's been a good market and very strong.
Newsom: it has. Again, we've had a nice technical rally. We've had some fundamentals behind it. But if this U.S. dollar continues to go up, that could start to put the clamps on some of the buying enthusiasm that we've seen in hogs over the last couple of weeks. We do have a very strong cash market going on in hogs right now. Hopefully we can continue that into next week, at least the early part of next week, so I would anticipate the market to move higher.
Pearson: Give me some price brackets on fed cattle first and then on hogs. What kind are you shooting for this year?
Newsom: You know, long term -- I've got to be honest with you, Mark; I've forgotten where the Dec. -- October and Dec. Are trading. But I would anticipate -- I would think that we should be able to put another $3-$5 on those deferred contracts. August could be getting a little bit heavy in this price range where, you know, where we close this week, it could start to get a little heavy in here once we rally early next week.
Pearson: Okay. Rally continues in hogs? Maybe we'll see some more improvement there?
Newsom: I think so. I think so.
Pearson: Precious metals. We've got 15 seconds. Gold market, where are you? Bullish? Bearish? Neutral?
Newsom: Neutral on gold right now. Heavy resistance at 1,540. It's going to be tough to get through that. Then you've got 1,550 up above that.
Pearson:Darin Newsom, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Darin on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.
Pearson:And be sure to join us again next week when we'll examine the outlook for prices in the light of a strengthening dollar ... Until then, thanks for watching. I'm Mark Pearson. Have a great week.