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Market Analysis: Market analyst Virgil Robinson

posted on July 29, 2011


Grain markets reacted bullishly to the report but were pressured later in the week as a plummeting euro supported the dollar.

For the week, September wheat lost 20 cents, while the September corn contract moved 25 cents lower.

Soybeans followed the coarse grains lower as the September contract declined 33 cents.  Nearby meal prices also headed south with a weekly loss of more than $10 per ton.

In the softs, cotton pulled out of its freefall as the December contract settled Friday with a weekly gain of more than $3 per hundredweight.

In the dairy market, August Class III Milk futures gained 19 cents and the deferred contract advanced by 40 cents.

Over in livestock, the August cattle contract gained $2.07.  Nearby feeders moved 65 cents higher.  But the October lean hog contract lost 17 cents.

In the currency markets, the Euro advanced 22 basis points against the dollar.  Crude oil lost more than $4 per barrel.  Comex Gold traded in record territory and settled Friday with a weekly gain of $26.80 per ounce.  And the Goldman Sachs Commodity Index lost more than 15 points to close at 685.70.

Market Analysis: Market analyst Virgil Robinson

Yeager:  Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson.  Virgil, welcome back.   

Robinson:  Thank you, Paul.  Nice to be here.

Yeager: You know, the market is just all over the board, not so much commodity, but the word when it comes to the Dow and the S&P is anxious. Is that true both commodity and the other markets? 

Robinson:  I think it is, Paul. It's a task of risk aversion and, clearly, the commodity markets are inclined to be awfully risky. So I think that's been a part of the price discovery this last week.

Yeager: One thing that did go higher, gold. One thing that went lower, oil. What's that mean? 

Robinson:  Well, I’m not sure there's any strict or strong correlation between the two. But certainly gold has been on a role for quite sometime and is touted as, one, kind of a finite commodity and, two, kind of a haven for all kinds of different peril, and I think that clearly has been the case here. Crude oil, you know, production -- OPEC production is on pace with what they have scheduled to produce. Oil production out of the Bakken Region, the Permian Region, the Alberta oil sands all contributing to increased production.  So I don't sense there's any want or shortage of crude oil as we visit tonight.

Yeager: One thought, though, on the basis points dropping, that there might not be as much demand for oil. We're not traveling as much. We're not willing to go out. Therefore, we're not going to have that demand. Is that another thought?  Is that another though: is the Middle America consumer -- mid level consumer thinks? 

Robinson:  Yeah, I think that's certainly a part of what's happening here fundamentally underlying the marketplace. Cars have been more efficient. We're using more ethanol than we did in years past. And speaking of ethanol, a couple of things, Paul, that are worth noting to our listeners. The monthly close tonight in ethanol futures was the strongest dating back to the spring of 2006. The spread between gasoline futures and ethanol futures has narrowed of late. So let's be on alert there that clearly it behooves ethanol consumption when that spread is wider. So we need to watch that pretty carefully here moving forward.  That could have an effect on the ethanol marketplace, both futures and the cash.

Yeager: So do we see that going higher?  I mean you're talking about it shrinking, but is it going to --

Robinson:  Well, Paul, all I can tell you, you know, the trend of ethanol futures is clearly up. And as a result of that, if I’m a consumer or user of that particular product, I have to acknowledge that trend and plan or hedge accordingly. It wouldn't surprise me in the next few weeks to see kind of a phase of price consolidation. I think one of the fuel -- one of the things that drove ethanol this week was the announcement out of Brazil that they were going to continue their 25-percent ethanol blend in their motor fuel, and I think that kind of surprised the industry. We've been exporting quite a bit of ethanol to Brazil. And provided their economy stays on track -- and here's a word of caution regarding that statement. I think the average Brazilian consumer has now got him and/or herself leveraged very highly. They're discovering that interest rates or the interest on that debt is growing significantly. So please understand should there be a day of reconciliation there, that could take the edge off what's been driving that Brazilian economy, and that is the individual consumer.  

Yeager: Let's move more into the commodities. Let's talk a little bit about wheat: off about 19 cents. Thoughts on where that's headed? 

Robinson:  A couple things.  The average basis for both soft red wheat and hard red winter wheat is stronger than I’ve seen it in several years as they try and source each of those two commodities. If I owned those two, the cash article, I’d be inclined to reward that basis by selling the cash and then simultaneously or market timing some type of repurchase. I think there's awfully good leverage on one's money there. The basis is subject to change very abruptly moving forward. So I’d certainly recognize that strong basis and capitalize by moving cash to reward that strong basis.

Yeager: All right. Let's change gears into corn a little bit. Corn also down this week. But there's a lot of discussion about corn and, you know, we're still a couple of weeks away from that WASDE report, but there's still a lot of -- I mean we talked about anxiousness off the top. I would imagine it's helping that market, make it volatile.

Robinson:  We're debating acreage, both planted and harvested acreage, and clearly potential yield here, and that's likely to continue for the next several weeks, Paul. The June 30 stocks-in-all-positions report I think is worth drudging up here again. It was surprising inasmuch as stocks were much larger than we were all forecasting, and there could be several reasons for that.  Perhaps last year's crop was underestimated. Perhaps the crop was of a quality that conversion in livestock and in making ethanol is significantly better than years past. But understand that there is, based on that data, an adequate supply of old-crop corn. It's carrying a premium to new-crop delivery values as we visit tonight. Historically in instances like that that I’ve experienced, there is a transition.  And normally it's old-crop value dropping to and approaching new-crop value. If I owned old-crop corn -- and I don't; I’ve sold mine -- but if I did, I’d capture the basis, I’d capture this inverse, and I’d go ahead and price remaining old-crop corn at prevailing levels.

Yeager: Because you wonder how did you hold onto old crop when we've had such a dramatic increase in that time.

Robinson:  Several people much smarter than I.

Yeager: Or different foresight, different crystal balls. I had one viewer ask me this week, wanting to know if we're done seeing the days of 250 corn. Do you think we're done with those days? 

Robinson:  I do based on projections we've made, as well as others in terms of base-line projections moving forward. And a lot of those base-line projections are available at public domain.  Various ag econ departments have posted their long-term look in terms of supply and demand and price. So to answer your question, provided there's not a significant global meltdown, I would think the days of $2.50 and $3 corn are behind us.

Yeager: Don't think we ever would have thought that that would be the case for as long as it stayed at that level. Soybeans, WASDE there, they've really been helped at least in, you know, the Corn Belt area, by having good conditions -- good, hot conditions for beans. They like that type of weather. Any ideas the way that's pointing and how much of a crop we're going to have?

Robinson:  They're going to probably love August then, right?  Traditionally that's kind of the make-or-break month for soybean production, and this year probably will be no exception. The weather forecast -- and I’m not into making weather forecasts, but from what I have seen, there is a consensus.  And weather it to be more normal, not as hot as it's been through the month of July. And that certainly, if it comes to fruition, combined with some periodic showers, would produce some pretty significant and pretty large soybean crop. So given the fact we have a big supply of soybeans in the Southern Hemisphere, it's likely our carryover of this year's bean crop will be every bit as large, perhaps even larger than what the USDA projected in July. I again, would be looking for that opportunity to sell remaining old crop and then focus my attentions on new.

Yeager: We're looking at 13.5 on some of that. Still, to think that we're talking about beans in the teens in July, almost into August, still seems hard to believe.

Robinson:  Well, you know, the supply and demand situation in soybeans, if we were to try and generalize that by talking about a stocks-to-use ratio, they're still relatively tight U.S., less tight globally. But the fact remains the U.S. stocks-to-use ratio is tight and we need a sizable new crop to satisfy the demand that's forecast here in the up and coming months.

Yeager: There were some that started growing soybeans where they used to grow cotton. They weren't growing cotton as much. But cotton, we saw it at the $200 level. It took that hit but it is starting to bounce back just a little about. Why? 

Robinson:  A couple of reasons. We've taken 50 percent of the value of cotton away since April. We have acknowledged the fact that India, China, and Pakistan are likely to grow pretty sizable crops. Unfortunately, we have something of a production issue here in the U.S. in both Texas and Georgia. But the combination of increased acres year over year and production is likely to produce a bit more cotton supply in the U.S. and global supplies are forecast to increase about nine million metric tons year over year, and ending stocks grow about seven million metric tons.  So from a supply perspective -- supply perspective, we're not concerned about shortage moving forward.

Yeager: Okay. I need to move to livestock and talk about cattle. Cattle was one of the bright spots this week. Why? 

Robinson:  A couple things going on, I think, in cattle. We've had some weather concerns certainly. If you look at last month's cold storage report, even though we have, in fact, increased beef production, disappearance as measured by that report, supplies did not grow. So it clearly tells us demand, both domestic -- and we know that export demand has improved pretty significantly over the last several months.  We are now approaching or near that pre-BSE level.  That disappearance, despite the fact that price is significantly higher year over year has been pretty solid, Paul.

Yeager: We've got to squeeze in feeders and hogs in the last minute. Feeders quickly.

Robinson:  Feeders, tightening supply. Good demand. Should support and maintain this price structure through the balance of this year into the first part of 2012.

Yeager: All right. Hogs, $92 still sounds like a good number to me.

Robinson:  Yeah, kind of the same scenario, tightening supply, strong demand, profitability, cut-out values that are at an all-time high. Demand for pork here and for export is very strong. I don't sense the need for any hedges, at least at this point in the calendar through the end of the year.

Yeager: What would change that? 

Robinson:  Well, certainly should we have a default and the repercussions I think associated with that, that could skew commodity values in general.

Yeager:  Virgil Robinson, thank you so much.  That wraps up this edition of Market to Market.  But if you’d like more information from Virgil 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.

Yeager:  And be sure to join us next week when we'll examine private estimates on U.S. agricultural production.  Until then, thanks for watching.  I'm Paul Yeager.  Have a good week...


Tags: agriculture cattle commodity prices corn economy markets news pigs soybeans wheat